One Size Does Not Fit All: Unveiling Asymmetric Transmission of Monetary Policy in the Euro Area

Sangyup Choi, Kimoon Jeong and Jiseob Kim
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Kimoon Jeong: University of Virginia
Jiseob Kim: Yonsei University

No 2025rwp-256, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: Despite extensive research, there is little consensus on whether common monetary policy generates systematically asymmetric effects within the euro area. We argue that this ambiguity arises from failing to account for heterogeneity in local cyclical conditions at the time of policy changes, which leads state-dependent responses to obscure underlying cross-country differences. To address this, we construct a measure of country-specific monetary policy that internalizes local cyclical conditions. This adjustment reveals systematic asymmetries in policy transmission between core and periphery euro area countries that conventional methods overlook. We find that macroeconomic and financial variables respond more strongly in periphery countries. In contrast, credit and housing booms are largely absent in core countries. This differential response is consistent with the bank lending channel of monetary policy: banks in periphery countries ease mortgage lending standards following an expansionary shock, while those in core countries tighten them. Cross-border banking flow patterns further corroborate the importance of credit supply in explaining regional heterogeneity.

Keywords: Monetary Union; Country-specific monetary policy gap; Mortgage credit; Bank lending survey; Cross-border banking flows. (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 F52 G21 (search for similar items in EconPapers)
Pages: 47pages
Date: 2025-08
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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