Monetary Policy under EMU: Differences in the Transmission Mechanism?

This study identifies differences in the monetary policy transmission mechanism across countries in the euro area. It is argued that part of the differences in the response of economic activity to monetary policy during the pre-EMU period reflected differences in monetary policy reaction functions, rather than different transmission mechanisms. In particular, monetary policy appears to have been more persistent in Germany and in those countries closely following Germany (such as Netherlands and Austria) in the European Exchange Rate Mechanism. Monetary policy in these countries appears to have had significant effects on domestic output. The corollary is that under EMU other countries—in particular France, Italy, Ireland, and Finland—are expected to see more sensitivity of output to monetary policy under EMU. Nevertheless, a common monetary policy is still found to bring about heterogeneous output responses across countries, reflecting variations in the strength of the interest, credit, and exchange rate channels that remain under EMU