Journal Article

The Effects of Monetary Policy in the Euro Area

Michael Ehrmann, Leonardo Gambacorta, Jorge Martinez‐Pagés, Patrick Sevestre and Andreas Worms

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 19, issue 1, pages 58-72
Published in print March 2003 | ISSN: 0266-903X
Published online March 2003 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/19.1.58
The Effects of Monetary Policy in the Euro Area

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This paper presents evidence on the monetary transmission process in the euro area, based on macroeconomic data and on micro data on banks. According to the estimations of macro vector autoregression and macroeconometric models, a monetary policy tightening significantly reduces output and—after a time lag—also prices. The effect on output is temporary, while that on prices is permanent. Clear patterns of significant asymmetries in the monetary policy effects across countries do not emerge. The estimations based on micro data on banks show that the main factor that determines the average bank's response to monetary policy is its degree of liquidity: the lower its share of liquid assets in total assets, the more strongly does a bank reduce its lending in response to a monetary tightening. Bank size does not emerge as an important factor for a bank's reaction to monetary policy. These results hold for virtually all member countries of the European Monetary Union, despite the differences in their banking systems.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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