Transmission of the European Central Bank Monetary Policy Across Regional Stocks Markets

Abstract

In this paper we estimate the transmission of common euro area monetary policy shocks across the euro area main stock markets. To do so, we develop global SVAR models in which the ECB monetary policy is modeled as a function of euro area aggregate variables and the US variables that define the FED monetary policy shocks. Our results suggest, in line with economic theory, that the transmission of monetary policy across Eurozone stocks markets displays heterogeneity driven by differences in the listed firms’ characteristics but also by the distance between the actual ECB stance and the obtained by applying a Taylor rule implied in the ECB policy to country-specific macroeconomic data. These results highlight the need for a corrective fiscal policy on the undesirable effects of the common monetary policy and may allow policymakers to check the effects of their fiscal policies when any.