MACROECONOMIC DIVERGENCES AND ASYMMETRIC RESPONSES WITHIN THE EURO ZONE

Abstract

The paper deals with the nominal and real divergences within the Euro-zone (EZ) as a background for asymmetric European Central Bank’s (ECB’s) monetary transmission. In order to shed more light into these issues, the descriptive analysis of key nominal and real indicators confirms the core-periphery dichotomy within original EZ12 members, as well as the specific position of the emerging EZ19 members. Monetary (interest rate) transmission is explored via estimated Vector Autoregression (VAR) model for the representatives of the core (Germany, France, Belgium), as well as the periphery (Portugal, Spain and Greece), in the period 1999Q1-2018Q4. Observing the transmission of ECB’s interest rate (the shock) to gross domestic product (GDP) growth (the response), the results of variance decompositions and impulse responses indicate that interest rate channel works countercyclical in general. However, while stabilizing (countercyclical) effect is evident for the core (especially Germany), it is almost absent in the case of Greece. The conclusions highlight the vulnerability of the EZ in the sense of heterogeneous membership and, accordingly, asymmetric response to ECB’s monetary impulse. Our findings support the arguments of numerous research papers in emphasizing core-periphery dualism, German dominance hypothesis, and “one size fits some” monetary policy.