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N° 1996 - 03 |
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| February |
| The Transmission of Monetary Policy in
the European Countries |
Fernando Barran
Virginie Coudert
Benoît Mojon |
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The effects of monetary policy may change
from one country to another for various reasons. The impact of monetary policy,
even when such policy is concentrated on interest rates, may have numerous repercussions:
on credit, on the quantity of money and on the substitution of other financial
products. Its consequences for real activity and prices are determined by monetary
policy transmission channels taken as a whole, and by their respective importance.
The regulatory framework of banking, as well as banking practices specific to
each country and the structure of assets and liabilities may also play a role
in the various reactions by non-financial agents to interest rate changes. This
issue is crucial to European Monetary Union. If a common monetary policy is implemented,
it will have to be able to produce the same results from one country to another.
This text sets out to identify the sources of possible divergence at the level
of the national financial systems, and then seeks to verify econometrically if
the real economic responses to a shock in monetary policy are very different from
one country to another. The sample covered includes all the European countries
for which data were available: Austria, Denmark, Finland, France, Germany, Italy,
the Netherlands, Spain, and the United Kingdom.
A first source of divergence stems from the way that variations in the bank rate of central banks are spread to other markets. A 1 percentage point change of the money market rate does not impact as quickly on the base rate. The adjustment appears to be particularly slow in France, Denmark, and Finland, but very rapid in the United Kingdom. Credit indexation practices vary greatly in Europe. For example, mortgage credits are accorded mainly at fixed rates in France and Austria, but are variable in other countries. Ease of access to credit also seems to be heterogeneous across the continent, at least as far as housing credit is concerned, as demonstrated by variations in minimum down-payment conditions. Estimates on a VAR model show that the impact on GDP of a shock to monetary policy is fairly similar in scale and in time across countries. A breakdown of final demand, however, shows that investment is affected more. Residential investment is affected more or less from country to country, depending on the nature of the credit market. Another VAR model is used to test the importance of different transmission channels of monetary policy. Contrary to what one would expect for very open economies, the exchange rate channel does not seem to reinforce the impact of monetary policy. This may be explained by the fact that most of the countries in the sample are members of the EMS, and by the management of exchange rates carried out by the other countries, which tend to counter variations in exchange rates using monetary policy. Some tests show that the credit channel could be effective in the European countries, as credit has a tendency to contract more than money, in the wake of a negative monetary shock. However, more detailed tests by institutional sector, for France and Germany, do not seem to confirm this hypothesis. |
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