24 - Monetary policy transmission in the euro area: where do we stand?

Summary

Introduction

This chapter selectively brings together the main findings presented in the preceding ones to offer a characterisation of the monetary policy transmission in the euro area.

We organise our overview of the macro and micro evidence around one main question, namely, whether monetary policy transmission in the euro area can broadly be described as taking place through the classical interest rate channel (IRC). By ‘IRC’ we mean the response of aggregate demand components, GDP and prices to the change in the policy controlled interest rate that would take place if there were no capital market imperfections. Equivalently, the question we ask is whether accounting for such imperfections is necessary to understand the main features of monetary transmission in the euro area.

We focus on this specific ‘null hypothesis’ for several reasons. First, since the IRC is the conventional way in which monetary policy is presumed to operate in a large, fairly closed economy with a developed financial system, it is logical to ask whether it can explain the facts before looking at alternatives. Second, the commonly accepted – if not always fully accurate – picture of the euro area financial market is one in which banks play a prominent role. To check whether this prominence has implications for the transmission mechanism it is methodologically sound to start with a working assumption that denies any such implication.