The Industry Effects of Monetary Policy in the Euro Area

Gert Peersman · Frank R. Smets

266 citations0/0 files storedThe Economic Journal

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic theories and models

Abstract

We first estimate the effects of a euro area-wide monetary policy change on output growth in eleven industries of seven euro area countries over the period 1980-98. On average the negative effect of an interest rate tightening on output is significantly greater in recessions than in booms. There is, however, considerable cross-industry heterogeneity in both the overall policy effects and the degree of asymmetry across the two business cycle phases. We then explore which industry characteristics can account for this cross-industry heterogeneity. Differences in the overall policy effects can mainly be explained by the durability of the goods produced in the sector. This can be regarded as evidence for the conventional interest rate/cost-of-capital channel. In contrast, differences in the degree of asymmetry of policy effects are related to differences in financial structure, in particular the maturity structure of debt, the coverage ratio, financial leverage and firm size. This suggests that financial accelerator mechanisms can partly explain cross-industry differences in asymmetry. Copyright 2005 Royal Economic Society.

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References

1988Agency Costs, Net Worth, And Business Fluctuations 1994Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms 1998Monetary Policy Shocks: What Have We Learned and to What End?1994Credit Conditions and the Cyclical Behavior of Inventories 2001The monetary transmission mechanism in the euro area: more evidence from VAR analysis 2000Creating Business Cycles Through Credit Constraints 1995Is there a "credit channel" for monetary policy?

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