Title: Financial fragmentation and the monetary transmission mechanism in the Euro area: A smooth transition VAR approach
Authors: Hans-Helmut Kotz - Harvard University (United States)
Willi Semmler - New School for Social Research (United States)
Ibrahim Tahri - PIK (Potsdam Institute for Climate Impact Research) (Germany) [presenting]
Abstract: The aim is to investigate the effect of financial fragmentation on the monetary transmission mechanism in the four largest euro area economies; Germany and France as core members and Italy and Spain as peripheral countries. We analyze the effects of financial fragmentation on the monetary transmission mechanism through the traditional interest rate channel. To analyze the impact of changes in policy rates on the behavior of real variables such as aggregate output and employment we employ a Smooth Transition VAR (VSTAR) model. Using a nonlinear multivariate time series model helps us capture the regime-dependent dynamics of the variables under study. The results obtained show that money market rates targeted by the central bank do not completely pass through to banks lending rates to firms, hence supporting the hypothesis of an impairment of the monetary transmission mechanism as a result of financial fragmentation.