NEW MACROECONOMIC EVIDENCE ON MONETARY POLICY TRANSMISSION IN THE EURO AREA

This paper presents some new macroeconomic evidence on the transmission mechanism of monetary policy in the euro area. The evidence is drawn from a number of collaborative research projects undertaken by the ECB and the National Central Banks (NCBs) of the euro area and utilizes a variety of national and euro area aggregate VAR and structural macro-economic models. A qualitatively similar pattern of results following a monetary policy shock is observed across models, with the maximum output effect typically occurring after 1-2 years. Price effects are somewhat slower to materialize and are more persistent. According to both sets of results, investment is the main (domestic) contributor to the drop in real GDP. This contrasts with findings for the United States where consumption plays a dominant role in the transmission process. Finally, structural macroeconomic models predict that if the exchange rate moves in line with an Uncovered Interest Parity (UIP) condition, the short-run output and price effects are largely driven by the exchange rate channel. (JEL: C50, C52, E52, E17, E5)