The Euro Area Monetary Policy Transmission Mechanism

The year of 1999 saw the 11 member states of Euro Area (in the year 2000, Greece became the 12th member of the Euro Area) give their monetary policy to the hand of ECB. ECB thus are responsible for the making of Euro-area single monetary policy. But the mechanisms by which and the extent to which monetary shocks are transmitted into prices and real economic activity may vary from country to country. This dissertation investigates how and to what extent the impact of monetary policy depends on national features of financial systems. The main interest is in examining whether the financial structure of member states have changed to a more homogeneous one in concurrent with the integration process, and in gauging the impact of financial structure heterogeneity on the single monetary transmission mechanism.From the perspective of financial structure and monetary transmission mechanism, the dissertation systematically studied the heterogeneity in members' financial structure and the implications for single monetary policy transmission mechanism, so as to understand challenges and problems faced with single monetary policy. The dissertation is divided into seven chapters:The first chapter is the introduction section. The introduction part defines our object of study to be the relationship between financial structure heterogeneity and the single monetary policy transmission mechanism, the main focus is thus on the facts ever since the introduction of the single monetary policy. Moreover, this section also points out the main methods and the main differences of our study with the previous related ones.The second chapter is a systematic review of the relevant literature. Our aim is to understand the variety of transmission mechanisms and the implicit financial structure premises, so as to establish the theoretical foundation for the analysis of financial structure and the single monetary policy transmission. Besides, this chapter also reviewed literatures related to Euro-area monetary policy transmission.The third chapter looks at the start point of the single monetary policy transmission, i.e. the European System of Central Banks, including its regime characteristics, present monetary strategies, main objectives and instruments used. Based on that, we further point out the complexity and difficulties during the conduct of single monetary policy as members are of different financial structures. Then, weconduct a VAR analysis for Euro Area past single monetary policy experiences. We find that the potency of single monetary policy have been reduced, which may point to members' financial structure heterogeneity for an explanation.The fourth chapter is a comparative study on members' financial structure facts and development trends. The analysis go through facts such as financial market structure and deepening trend, financial innovations development and the relative importance of financial institutions, financial instruments development and the financial constraints on non-financial sectors, ect. We find that the disintermediation process of banks, the securitization of financial assets and the penetration of insurance as well as pension funds are different between member states. The introduction and conduct of single monetary policy have not led to a more homogenous financial structure between members, which find its expression also on the various financial constraints faced by member countries' non-financial sectors.The fifth chapter describes industrial organization characteristics of member countries' bank systems and their balance sheet facts. What's more, this chapter also taps on the relationship between bank industrial organization features and monetary policy transmission, between bank liability management and bank credit supply capability, between bank asset portfolio and credit supply inclination. The analysis points to a fragmented retail bank markets in Euro Area, which via interest rate and bank lending channels may well lead to the asymmetric transmission of the single monetary policy.The sixth chapter carries out VECM and GMM panel estimation so as to test the implications of country-specific financial features for Euro Area monetary policy transmission mechanism. Again, the empirical evidences point to a significant impairment of financial structure heterogeneity on single monetary policy transmission. Specifically, heterogeneity will lead to asymmetric interest rate and bank credit channels, which ultimately induces asymmetric policy results between member countries. It is therefore necessary to push forward in Euro Area the financial integration process.The seventh chapter gathers up the main findings and draws the final conclusions. Besides, this chapter also points out the limitations and future study areas of this dissertation.