Capital Markets Union and monetary policy performance : comes financial market variety at a cost?

Europe’s financial landscape has substantial institutional variety. This reflects different societal responses to (or preferences with regard to) trade-offs. For monetary policy, it implies a challenging environment, particularly in times of financial crises. Using a non-linear VAR-model we document diverging responses to an identical monetary policy impulse, especially between two states of nature (regimes). Crucially, with such heterogeneity between countries in crisis, monetary policy can become, counter-intentionally, de-stabilizing. Thus, a more homogenous financial infrastructure could mitigate such counterproductive policy effects. However, the underlying reasons for the institutional variety are rooted deeply in societal compromises. And convergence must not necessarily be towards a stronger emphasis on capital markets.