The Challenge of the Early Years
Edited by Marco Buti and André Sapir
Chapter 4: Monetary Policy Transmission in EMU
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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