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How can financial integration impact the monetary transmission mechanism
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We investigate whether the integration level of the Euro Area’s financial system influences thetransmission mechanism of monetary policy. We compute the impulse responses of inflationand output, while implementing local projections on panel data comprising each member stateand subsamples. For a low-level of financial integration, the responses of inflation and outputto a tightening monetary action are close tonull. For a high-level of financial integration, theresponses of inflation and output to the same shock becomenegative. These findings suggestthat the fragmentation of the financial system may limit the European Central Bank’s monetarypolicy transmission.
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Monetary Policy Local Projection Monetary Union Financial Integration