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Monetary Policy Transmission in the Euro Zone

Ayla OguÅŸ Binatli and Niloufer Sohrabji

Athens Journal of Business & Economics, 2019, vol. 5, issue 1, 79-92

Abstract: This paper focuses on monetary policy transmission through the bank lending channel in the euro zone. We analyze the relationship between output, inflation, short-term and longterm interest rates, and bank loans. In addition, based on recent concerns of rising deficits and debt we include three variables that capture fiscal vulnerability. Using quarterly data from 2002 to 2016 for the original twelve members of the euro zone (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain) we estimate a panel vector autoregression and examine impulse responses and variance decompositions. Our results show that tight monetary policy leads to an expected decline in output, but surprisingly, raises prices. We also find that the high deficits and debt burdens affect monetary policy transmission for the euro zone-12 countries. Overall, our results suggest that the euro zone is at best, only partially functioning as a cohesive unitKeywords: Budgetary Policy, Capital Taxation Rate, Consumption Taxation Rate, DSGE Model, Labor Taxation Rate, Wages Rigidity

Date: 2019
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DOI: 10.30958/ajbe.5-1-4

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