The Monetary Transmission Mechanism in the Euro Area: Has it Changed and Why?

49 Pages Posted: 23 May 2011

Date Written: April 12, 2011

Abstract

Based on a structural VAR and a dynamic general equilibrium model, we provide evidence of the changes in the monetary transmission mechanism (MTM) in the European Monetary Union after the adoption of the common currency in 1999. The estimation of a Bayesian VAR over the periods before and after 1999 suggests that the effects of a monetary policy shock on output and prices have not significantly changed over time. We claim that this cannot be the final word on the evolution of the MTM as changes in the conduct of monetary policy and the structure of the economy may have offset each other giving rise to similar responses of output and inflation to monetary policy shocks between the two periods. The estimation of a DSGE model with several real and nominal frictions over the two sub-samples shows that monetary policy has become more effective in stabilizing the economy as the result of a decrease in the degree of nominal rigidities and a shift in monetary policy towards inflation stabilization.

Keywords: monetary policy, transmission mechanism, Bayesian methods

JEL Classification: E32, E37, E52, E58

Suggested Citation

Cecioni, Martina and Neri, Stefano, The Monetary Transmission Mechanism in the Euro Area: Has it Changed and Why? (April 12, 2011). Bank of Italy Temi di Discussione (Working Paper) No. 808, Available at SSRN: https://ssrn.com/abstract=1849863 or http://dx.doi.org/10.2139/ssrn.1849863

Martina Cecioni

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Stefano Neri (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 2821 (Phone)

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