Asymmetric bank lending channels and ECB monetary policy

The launch of the euro has prompted interest in the differences between financial systems and their consequences for monetary policy transmission. This paper analyses the case of a monetary union composed of countries with heterogeneous bank lending channels. In order to insulate the economies from the asymmetric effects produced by differences in national banking systems, a money supply process based on the interest rate on bonds and its spread with respect to the lending rate is proposed. Using a two-country rational expectations model, this study highlights the properties of the optimal monetary instrument. (C)) 2002 Elsevier Science B.V. All rights reserved.