Eurozone Monetary Policy: Different Effects Across Industries And Across The Business Cycle

The impact on output of interest rate changes in the eurozone is significantly greater in recessions than in booms. But there are also considerable differences across industries in the effects of monetary policy both overall and during the two phases of the business cycle. These are the conclusions of new research by Professors Gert Peersman and Frank Smets, published in the Economic Journal.

The researchers estimate the effects of a euro area-wide monetary policy shift on output growth in eleven industries of seven euro area countries – Austria, Belgium, France, Germany, the Netherlands, Italy and Spain – over the past 25 years. They find evidence that differences in the overall policy effects can mainly be explained by the durability of the goods produced in the sector. This can be regarded as evidence for the conventional interest rate/cost-of-capital channel of monetary policy transmission. These effects are economically very important. The impact of monetary policy on industries producing durable goods is almost three times as high as the impact on industries producing non-durable goods.

On the other hand, the researchers do not find evidence that capital intensity, the degree of openness or the financial structure matter for the overall effects of monetary policy. In contrast, differences in the degree of asymmetry of policy effects over the business cycle are mainly related to differences in financial structure and firm size. In particular, Peersman and Smets find that a higher proportion of short-term debt over total debt, a lower coverage ratio, higher financial leverage and smaller firms are associated with a greater sensitivity to
policy changes in recessions.

These effects are also economically significant though the latter characteristics are not relevant for monetary policy effects in an economic boom. This finding suggests that financial accelerator mechanisms or a broad credit channel can partly explain crossindustry differences in asymmetry and why some industries are more affected in recessions than others.

”The Industry Effects of Monetary Policy in the Euro Area” by Gert Peersman and Frank Smets is published in the April 2005 Economic Journal. Gert Peersman is Professor of Economics at Ghent University; Frank Smets is at the European Central Bank.

Gert Peersman

+32-9-264-35-14 | Gert.peersman@ugent.be