The Industry Effects of Monetary Policy in the Euro Area

Abstract

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Loss aversion and the asymmetric transmission of monetary policy

“…According to their empirical analysis, the most pervasive form of non-linearity is represented by the asymmetric transmission of monetary policy over contractions and expansions in the business cycle. In this respect, the econometric evidence available to date has mostly focused on the state-dependent responsiveness of output and in ‡ation, reporting two coexisting regularities (see also Weise, 1999 andPeersman andSmets, 2005). On one hand, monetary policy innovations have greater impact on output during contractions.…”

“…4 For instance, Peersman and Smets (2005) suggest that the …nancial accelerator theory may explain why the e¤ects of money on output are stronger in contractions. However, this mechanism implies an analogous ampli…cation (attenuation) of monetary policy innovations on both prices and real activity during contractions (expansions).…”

Financial Shocks and the Real Economy in a Nonlinear World: From Theory to Estimation

“…In a subsequent paper, Peersman and Smets (2005) estimate the effects of a common monetary policy shock on output growth in eleven industries of seven euro-area countries and find that, on average, the negative effect of an interest rate tightening 9 is significantly greater in recessions than in expansions. In line with the theoretical literature discussed in Section 2, these authors find that financial accelerator mechanisms can partly explain the differential impact in recessions versus booms (the external finance premium is more sensitive to shocks during a recession than during an expansion).…”

Financial shocks and the real economy in a nonlinear world: From theory to estimation

“…One of the first attempts is by Ciccarelli, Ortega and Valderrama (2012) Peersman and Smets (2001) employ a multivariate two-state Markov-switching model in order to examine the role of financial frictions in the transmission of monetary policy, contingent on the state of the economy (recession or boom). In a subsequent paper, Peersman and Smets (2005) estimate the effects of a common monetary policy shock on output growth in eleven industries of seven euro-area countries and find that, on average, the negative effect of an interest rate tightening is significantly greater in recessions than in expansions. In line with the theoretical literature discussed in Section 2, these authors find that financial accelerator mechanisms can partly explain the differential impact in recessions versus booms (the external finance premium is more sensitive to shocks during a recession than during an expansion).…”