Germany and the Euro Area: Differences in the Transmission Process of Monetary Policy

This study analyses the transmission of monetary policy in Germany for the EMS period in the framework of a structural vector error correction model (S-VECM) analysis. Cointegration relations derived from economic theory are tested within the Johansen framework in the first step. Three stable long-run relationships are found: a money demand relation, an interest rate spread and a stationary real interest rate. Based on the system taking these long-run relations into account, contemporaneous and long-run restrictions proposed by economic theory are imposed in the second step of the analysis identifying five structural shocks to the economy. The outcome of the analysis of the German monetary transmission process is compared to the findings of aggregated euro-area studies. The results indicate differences in real effects of monetary policy between Germany and other euro area countries. This finding highlights the importance to consider the national experiences in the context of monetary policy of the ECB.