Differences in the Transmission of Monetary Policy in the EURO Area: Empirical Approach

The paper examines the impact of interest rate changes on real economic activity for a range of EU countries including Ireland. The objective is to compare how monetary policy shocks are transmitted to output in the economies of the euro area prior to a common monetary policy. A number of studies have analysed how the effects of monetary policy can vary between countries, for example Gerlach and Smets (1995) and Ramaswamy and Sloek (1997). These studies have analysed a range of EU countries but Ireland has tended to be omitted due to the lack of the necessary quarterly national accounts' data for output. In this paper we address this omission by using a constructed quarterly GDP data series from 1972 to 1998 for Ireland and apply a Vector Auto-regression (VAR) methodology that incorporates prices, output and interest rates. The paper uses both an unrestricted VAR model and a Structural VAR model based on Bernanke-Sims type decompositions to compare the impulse responses of output to a monetary policy shock in thirteen EU countries. In order to compare the responses we have used similar data series, sample periods and an identical econometric framework for all countries. The results would suggest that Ireland experiences greater output responses for a given monetary shock than all other euro area economies.