Interest rate control and the transmission of monetary policy

Fédéric Holm-Hadulla and Sebastiaan Pool

No 3048, Working Paper Series from European Central Bank

Abstract: We study how short-term interest rate volatility affects the transmission of monetary policy. To identify exogenous changes in volatility, we exploit the pronounced heteroskedasticity visible in the time-series of euro area short-term rates over the past two and a half decades. Interacting the exogenous variation in volatility with high-frequency-identified monetary policy shocks, we find that increases in volatility dampen the effects of monetary policy on output and prices. This dampening effect is visible already at the earlier stages of transmission, including in the pricing and volume of bank lending. JEL Classification: E44, E52, E58

Keywords: interest rate volatility; monetary policy implementation; monetary policy transmission (search for similar items in EconPapers)
Date: 2025-04
Note: 1624014
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253048

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