How Has the Euro Changed the Monetary Transmission?

Jean Boivin (), Marc Giannoni and Benoit Mojon

No 14190, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper characterizes the transmission mechanism of monetary shocks across countries of the euro area, documents how this mechanism has changed with the introduction of the euro, and explores some potential explanations. The factor-augmented VAR (FAVAR) framework used is sufficiently rich to jointly model the euro area dynamics while permitting the transmission of shocks to be different across countries. We find important heterogeneity across countries in the effect of monetary shocks before the launch of the euro. In particular, we find that German interest-rate shocks triggered stronger responses of interest rates and consumption in some countries such as Italy and Spain than in Germany itself. According to our estimates, the creation of the euro has contributed 1) to a greater homogeneity of the transmission mechanism across countries, and 2) to an overall reduction in the effects of monetary shocks. Using a structural open-economy model, we argue that the combination of a change in the policy reaction function -- mainly toward a more aggressive response to inflation and output -- and the elimination of an exchange-rate risk can explain the evolution of the monetary transmission mechanism observed empirically.

JEL-codes: C3 D2 E31 E4 E5 F4 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-opm
Note: EFG ME
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Citations: View citations in EconPapers (98)

Published as How Has the Euro Changed the Monetary Transmission Mechanism? , Jean Boivin, Marc P. Giannoni, Benoît Mojon. in NBER Macroeconomics Annual 2008, Volume 23 , Acemoglu, Rogoff, and Woodford. 2009

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