The Real Effects of Monetary Policy in the European Union: What Are the Differences?

IMF Working Papers, December 1, 1997

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The Real Effects of Monetary Policy in the European Union: What Are the Differences?

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Bibliographic details

• Authors: Ramana Ramaswamy, Torsten M Sloek
• Published: December 1, 1997
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451857719.001

Summary and main finding

• The European Union (EU) countries fall into two broad groups according to the effects of monetary policy adjustments on economic activity.
• Estimates based on a vector autoregression model indicate:
  • In one group (Austria, Belgium, Finland, Germany, Netherlands, and United Kingdom) the full effects of a contractionary monetary shock on output take roughly twice as long to occur, but are almost twice as deep as in the other group.
  • The other group comprises Denmark, France, Italy, Portugal, Spain, and Sweden.
• The paper discusses the implications of these results for the effective conduct of monetary policy in the euro area.

Methodology

• Econometric approach: Vector autoregression (VAR) model.
• Focus: Response of output to contractionary monetary shocks and the transmission of monetary policy.
• Key technical terms preserved from the source: VAR approach, Vector autoregression, monetary transmission mechanism, monetary policy innovation, Short term interest rates.

Key findings and statistics

• Country group A (slower, deeper response): Austria; Belgium; Finland; Germany; Netherlands; United Kingdom.
• Country group B (faster, shallower response): Denmark; France; Italy; Portugal; Spain; Sweden.
• Magnitude and timing summary from VAR estimates:
  • "Take roughly twice as long to occur" (timing difference).
  • "Almost twice as deep" (magnitude difference).

Policy implications

• Differences in timing and depth of output responses across EU countries have implications for:
  • The effective conduct of monetary policy in the euro area.
  • Considerations of heterogeneity in monetary transmission when designing common monetary policy frameworks.
• The paper's discussion centers on how these heterogeneous real effects should inform euro-area policy design and implementation.

Content in this bundle

• The Real Effects of Monetary Policy in the European Union: What Are the Defferences? - WP/97/160
  • The Real Effects of Monetary Policy in the European Union: What Are the Defferences? - WP/97/160 (Markdown version)
  • The Real Effects of Monetary Policy in the European Union: What Are the Defferences? - WP/97/160 (PDF)