Essays in Memory of Albert Ando
Edited by Lawrence R. Klein
7. The euro and the transmission of monetary policy* Ignazio Angeloni and Michael Ehrmann 1. INTRODUCTION AND SUMMARY Monetary policy transmission in Europe has become a much more interesting research subject lately. Economic and monetary union (EMU) is a major institutional reform, likely to change the European economy in many ways. The monetary policy transmission process (MTP) – the set of links through which monetary policy aﬀects the economy – is a central element in this transformation. While these changes unfold, and before they are even fully understood, the European Central Bank (ECB) needs the best available information on how transmission works in the new arrangement in order to conduct its policy. Not surprisingly, research on this subject has intensiﬁed since 1999. In this chapter we attempt a ﬁrst assessment of the nexus between EMU1 and the euro area transmission process, using the most recent data. At least since Lucas’s celebrated ‘critique’, it has been recognized that regime changes impact on the expectations formation mechanisms and hence on the economy’s response to policy. It is hard to think of examples where this line of reasoning could apply more forcefully than EMU. However, it is important to bear in mind that EMU is a process, not a one-time event. The transition to a new currency and monetary policy was something economic agents had time to prepare for, and adjust to, over a number of years. This complicates signiﬁcantly the task of identifying causal links. In any event, there are several...
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