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The monetary transmission mechanism in the euro area: has it changed and why?

Martina Cecioni () and Stefano Neri ()

No 808, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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 (search for similar items in EconPapers)
JEL-codes: E32 E37 E52 E58 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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