We investigate the possible existence of asymmetries among Euro Area countries reactions to the European Central Bank monetary policy. Our analysis is based on a Structural Dynamic Factor model estimated on a large panel of Euro Area quarterly variables. We find that, despite the single monetary policy has had the effect of reducing heterogeneity in impulse responses, member states still react asymmetrically in terms of prices and unemployment, while no difference appears in terms of output. These results are the consequence of country specific structures, rather than of European Central Bank policies.JEL Classification: C32, E41, E52

We investigate the possible existence of asymmetries among Euro Area countries reactions to the European Central Bank monetary policy. Our analysis is based on a Structural Dynamic Factor model estimated on a large panel of Euro Area quarterly variables. We find that, despite the single monetary policy has had the effect of reducing heterogeneity in impulse responses, member states still react asymmetrically in terms of prices and unemployment, while no difference appears in terms of output. These results are the consequence of country specific structures, rather than of European Central Bank policies.JEL Classification: C32, E41, E52

Inflation in the euro area has been falling steadily since early 2013 and at the end of 2014 turned negative. Part of the decline has been due to oil prices, but the weakness of aggregate demand has also played a significant role. This paper uses a VAR model to quantify the contribution of oil supply, aggregate demand and monetary policy shocks (identified by means of sign restrictions) on inflation in the euro area. The analysis suggests that in the last two years inflation has been driven down by all three factors, as the effective lower bound to policy rates has prevented the European Central Bank from reducing the short-term rates to support economic activity and align inflation with the definition of price stability. Remarkably, the joint contribution of monetary and demand shocks is at least as important as that of oil price developments to the deviation of inflation from its baseline. Country-by-country analysis shows that both aggregate demand and oil supply shocks have driven inflation down everywhere, albeit with varying intensity. The findings stand confirmed after a series of robustness checks.

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We employ a recent time-varying cointegration test to revisit the usefulness of long-run money demand equations for the ECB, addressing the issue of their instability by means of a model evaluation exercise. Building on the results, we make a twofold contribution. First, we propose a novel stable money demand equation relying on two crucial factors: a speculative motive, represented by domestic and foreign price-earnings ratios, and a precautionary motive, measured by changes in unemployment. Second, we use the model to derive relevant policy implications for the ECB, since excess liquidity looks more useful for forecasting stock market busts than future inflation. Overall, this evidence points to (i) a possible evolution of the monetary pillar in the direction of pursuing financial stability and (ii) the exclusion of a sudden liquidity-driven inflationary burst after the exit from the prolonged period of unconventional monetary measures. JEL Classification numbers: E41, E52, C32. *The views here expressed are those of the authors and do not necessary reflect those of the Banca d'Italia or the Eurosystem.1 In contrast, Ireland (2004) has challenged this view and a number of more recent studies have included money in models aimed to monetary policy analysis (Zanetti, 2012;Benati et al., 2017).