The Regional Effects of Monetary Policy in the Euro Area: Does One Size Fit All or None?

Karlo Kotarac, Davor Kunovac and Ozana Nadoveza
Additional contact information
Karlo Kotarac: Valcon
Davor Kunovac: Croatian National Bank, University of Rijeka, Faculty of Economics and Business
Ozana Nadoveza: University of Zagreb, Faculty of Economics and Business

No 76, Working Papers from The Croatian National Bank, Croatia

Abstract: We estimate a Structural Dynamic Factor Model for 165 NUTS 2 regions across 11 euro area countries over 2000–2023, decomposing regional GDP growth into common euro area, countryspecific, and regional components. This is the first structural shock decomposition at the regional level for the euro area, suitable to evaluate optimum currency area (OCA) properties along both shock-similarity and monetary policy transmission dimensions. Four findings emerge. First, the relative importance of common euro area shocks has increased steadily at both the country and union levels, indicating improving OCA properties, while country-specific components - most pronounced in peripheral economies - have declined, pointing to a gradual erosion of the border effect. Second, aggregate business cycle synchronization conceals substantial within-country heterogeneity, implying that the costs of relinquishing monetary policy autonomy are distributed unevenly across regions and countries. Third, euro area regional dynamics are driven predominantly by endogenous OCA convergence rather than specialization-induced divergence; regions with atypical sectoral compositions do face greater exposure to idiosyncratic shocks, but this reflects structural or geographic distinctiveness rather than integration-driven specialization. Fourth, monetary policy shocks generate smaller and more homogeneous regional output responses than demand or supply shocks, and transmission heterogeneity - while modestly increasing over the sample - reflects within-country regional divergence rather than cross-country fragmentation. Taken together, OCA properties at the regional and country levels are broadly comparable, and heterogeneous monetary transmission does not constitute a major threat to policy effectiveness.

Keywords: Regional divergence; Regional heterogeneity; Monetary policy; SDFM (search for similar items in EconPapers)
JEL-codes: E32 E52 F45 (search for similar items in EconPapers)
Pages: 98
Date: 2026-07-23
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.hnb.hr/documents/20182/5919481/w-076.p ... =1.0&t=1785239861046 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hnb:wpaper:76

Access Statistics for this paper

More papers in Working Papers from The Croatian National Bank, Croatia
Bibliographic data for series maintained by Romana Sinković ().