Monetary transmission mechanism and time variation in the Euro area

Abstract

This paper examines the monetary transmission mechanism in the Euro area (EA) for the period of single monetary policy using factor-augmented vector autoregressive (FAVAR) techniques. The aims of the paper are threefold. First, a novel dataset consisting of 120 disaggregated macroeconomic time series spanning the period 1999:M1 through 2011:M12 is gathered for the EA as an aggregate. Second, a Bayesian joint estimation technique of the FAVAR approach is applied to the European data in order to investigate the impacts of monetary policy shocks on the economy. Third, time variation in the transmission mechanism and the impact of the global financial crisis are investigated in the FAVAR context using a rolling windows technique. We find that there are considerable gains from the implementation of the Bayesian technique such as smoother impulse response functions and statistical significance of the estimates. According to our rolling estimations, consumer prices and monetary aggregates display the most time-variant responses to the monetary policy shocks in the EA.