Monetary Policy Implementation and the Euro Area Money Market

Abstract

This paper studies the effects of monetary policy implementation on the euro area money market. In particular, volatility of interest rates with various maturities and volatility transmission along the yield curve is analyzed. It is found that the way monetary policy is implemented affects volatility of most money market rates, except the twelve-month rate. These effects are strongest at the short end of the yield curve. Notwithstanding, firms' investment and households' consumption decisions depend mostly on longer term rates, which indicates that the operating procedures in place implement monetary policy decisions very efficiently, without inducing real costs on the economy. Furthermore, some calendar day effects, a U-shaped volatility curve and strong evidence in favor of the expectation hypothesis are documented.