Common Monetary Policy with Different Effects?

Since the introduction of the Euro on 1 January 1999, the European Central Bank (ECB) has also taken over control of the monetary policy instruments for the whole European Monetary Union (EMU). Contrary to the period before 1999, the dominant monetary policy signals will be changes in interest rate and credit supply conditions rather than exchange rate fluctuations. For the first time, the eleven member states will be exposed to a unified monetary policy, although their economic structures, the financing strategies of firms and households, and the wage and price setting mechanisms still differ widely. Therefore a unified monetary policy is likely to generate different responses in the member states. Even long-standing monetary unions, such as the USA, show regional differences in the response to interest rate changes by the central bank. GDP in the Great Lakes area, for example, reacts 50 percent more strongly than the U.S. average, while the response in the South-West and the Rocky Mountains area is 50 percent below average. To account for these differences, U.S. authors refer to regional agglomeration of interest rate sensitive sectors and small-scale banking institutions. A comparison of empirical studies on the interest rate response of the euro participants and a detailed study of their structural characteristics provides a heterogeneous picture for the EMU. Studies on the interest rate response of euro member states show that countries may appear to be heavily or mildly affected, depending on the method chosen and the sample of countries analysed (4 to 10). Country-specific structural differences within the EMU are, on average, comparable to those between the U.S. states, but the indicators select alternating countries as specifically affected. For example, the share of manufacturing in total output is highest in Germany and Ireland, whereas the share of short-term credit financing is highest in Italy, which means that changes in short-term interest rates have an immediate impact on capital costs for Italian firms. Flexible real wages allow a fast adjustment of firms and households to unexpected changes in monetary policy. On average, real wages are more flexible in the USA than in the EMU. Austria and Italy, however, show levels of flexibility similar to the USA, whereas real wages in Germany and Spain are comparatively rigid. In the latter countries we may expect a stronger response of GDP and unemployment to interest rate signals of the ECB.Gemeinsame Geldpolitik – Unterschiedliche Auswirkungen?; Schwerpunkt "Geldpolitik in der Europäischen Währungsunion"; Common Monetary Policy with Different Effects?