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EMU and Economic Policy in Europe

The Challenge of the Early Years

Edited by Marco Buti and André Sapir

EMU is a completely new policy regime which has significant economic implications and which, it is hoped, will ultimately enhance the role of Europe on the world stage. EMU and Economic Policy in Europe takes stock of the initial experiences of EMU and assesses the challenges which will have to be addressed in the early years of its existence to ensure its long-term objectives are successfully achieved.
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Chapter 4: Monetary Policy Transmission in EMU

Massimo Suardi


Massimo Suardi* 1. INTRODUCTION1 The decision to introduce the euro has prompted a large literature examining potential differences in national prices and output responses to monetary policy. Establishing the extent of such differences is important because heterogeneous national responses to the single monetary policy would contribute to cyclical divergence within the euro area. While regional differences in monetary transmission in other large monetary unions (such as the US or large EU economies) have not attracted much attention in the past, they are a potentially more serious problem in the euro area, because the latter is not a single political entity but a union of independent countries which retain responsibility for non-monetary economic policies. Moreover, asymmetries in monetary transmission are likely to be more pronounced during the early years of the euro, when the potential for convergence in economic and financial structures is still to a large extent unrealized and economic agents have not yet fully adapted their behaviour to the new policy regime. The recent empirical literature on this topic can be broadly classified into two main strands, according to their respective focus on the macro- or the microeconomic level. At the macro level, the numerous studies that have tried to establish the extent of asymmetries in monetary transmission using a variety of econometric models and techniques have so far failed to provide a consistent and robust picture of cross-country differences. Most of these studies are riddled with methodological problems.2 This state of affairs...

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