Cross‐country asymmetries in monetary policy transmission: evidence from EMU members

Abstract

This paper analyzes monetary policy asymmetries in EMU participating countries. In particular, we use a structural dynamic modelling approach to investigate asymmetric monetary transmission in Europe. Asymmetries are investigated in two different ways. First, we restrict the estimated structural models reflecting the monetary constraints each country faced during the EMS period. We obtain well‐behaved and comparable effects of monetary policy shocks. Second, efficiency frontiers for the selected EMU countries are estimated. In computing the optimal combinations of output gap and inflation volatility we use a weighted average of interest rate and exchange rate, i.e. the Monetary Condition Index (MCI), as a policy instrument. The impulse response analysis implemented with the MCI shows relatively small differences in the responses of the real economy to monetary policy shocks. Altogether the results suggest that, no matter which policy instrument is used, output gap and inflation respond to identical monetary shocks with a similar speed and movement, albeit with a different degree of effect.

Keywords:

• Monetary transmission mechanism
• asymmetries
• MCI

Acknowledgements

We would like to thank Paul De Grauwe, Mike R. Wickens, Ugo Marani and the participants at the XIV biennial AISSEC Conference in Naples for their useful comments. They do not share any responsibility for the remaining errors.