The Industry Effects of Monetary Policy in the Euro Area

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,...

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Bibliographic Details
Published in:The Economic journal (London) 2005-04, Vol.115 (503), p.319-342
Main Authors: Peersman, Gert, Smets, Frank
Format: Article
Language:English
Subjects:
Asymmetry
Business cycles
Capital costs
Data analysis
Durability
Economic analysis
Economic and Monetary Union
Economic fluctuations
Economic impact
Economic recessions
Economics
Euro
Euro Zone
Europe
Eurozone
Financial leverage
Financial services industries
Financial systems
Industrial policy
Industry
Interest rates
Monetary economics
Monetary policy
Monetary theory
Output rate
Policy making
Regression analysis
Studies
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Summary: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.
ISSN:0013-0133
1468-0297
DOI:10.1111/j.1468-0297.2005.00991.x