Towards an explanation of cross-country asymmetries in monetary transmission

Abstract

This paper quantifies the importance of financial structure, labor market rigidities and industry mix for the monetary transmission mechanism. To do so, I determine how closely the impulse responses to a monetary policy shock obtained from country-specific vectorautoregressive (VAR) models and a non-standard panel VAR model match. In the country-specific VAR models, the impulse responses vary across countries in an unrestricted fashion. In the panel VAR model, the impulse responses also vary across countries, but only to the extent that countries differ regarding their financial structure, labor market rigidities and industry mix. For a sample of 20 industrialized countries over the time period from 1995 to 2009, I find that up to 70% (50%) of the cross-country asymmetries in the responses of output (prices) to a monetary policy shock can be replicated by accounting for cross-country differences in financial structure, labor market rigidities and industry mix. Moreover, while in the short run asymmetries in the output responses arise mainly due to cross-country differences in industry mix, in the medium run differences in financial structure and labor market rigidities are more important. Finally, cross-country differences in industry mix appear to be of rather minor importance for cross-country asymmetries in the transmission of monetary policy to prices.