Bank interconnectedness and monetary policy transmission : evidence from the euro area

Álvarez, Sofía; Barczay, Michael; Galambos, Guadalupe; Sandler, Ina; Schmidt, Rasmus

Bank interconnectedness and monetary policy transmission : evidence from the euro area

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Álvarez, S, Barczay, M, Galambos, G, Sandler, I, Schmidt, R. Bank interconnectedness and monetary policy transmission : evidence from the euro area. 2019. handle: http://hdl.handle.net/10230/43310

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Abstract

Whereas monetary policy in the euro area is conducted by one single authority, the European Central Bank (ECB), the real effects of these decisions provoke different reactions among the set of targeted countries. An explanation for this finding is structural heterogeneity across the members of the eurozone. This paper assesses how commercial bank interconnectedness affects the propagation of monetary policy shocks across the euro countries between 2003 and 2018. We construct a panel data set of 12 euro area countries and identify exogenous monetary policy shocks using high-frequency data. Employing local projections, we find evidence that – in accordance with the theory – a contractionary monetary policy surprise leads to a reduction in the supply of loans in countries with a low degree of interconnectedness. Conversely, when the banking sector is highly interconnected, the impact of monetary policy is reduced and can even be reversed. This implies that a common monetary policy shock can have heterogeneous effects among countries of the euro area, depending on the degree of interconnectedness of their banking industries.