The Monetary Transmission Mechanism: Evidence and Implications for European Monetary Union

We provide some evidence consistent with a heterogeneous credit channel of monetary policy transmission in the European Union. Using the techniques of cointegration and Error Correction Models, we have shown that the external finance premium is one important leading indicator of real economic activity in some EU countries, namely, Denmark, Finland, Ireland, Italy and the Netherlands. No evidence is found for Belgium, France, Germany and the UK. These findings imply that a common monetary policy implemented by the European Central Bank might be transmitted in different ways across the member countries of the monetary union, thus exacerbating existing regional disparities among the member countries.