Fragmentation and Monetary Policy in the Euro Area

Author/Editor: A. J. Al-Eyd ; Pelin Berkmen
Publication Date: October 04, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: The ECB has taken a range of actions to address bank funding problems, eliminate excessive risk in sovereign markets, and safeguard monetary transmission. But euro area financial markets have remained fragmented, driving retail interest rates in stressed markets far above those in the core. This has impeded the flow of credit and undermined the transmission of monetary policy. Analysis presented here indicates that the credit channel of monetary policy has broken down during the crisis, particularly in stressed markets, and that SMEs in these economies appear to be most affected by elevated lending rates.Given these stresses, the ECB can undertake additional targeted policy measures, including through additional term loans, collateral policies, and private asset purchases.
Series: Working Paper No. 13/208
Subject(s): Monetary policy | Euro Area | Capital markets | Sovereign debt | Bond issues | Banks | Interest rates | Credit risk | Monetary transmission mechanism | European Central Bank

Publication Date: October 04, 2013
ISBN/ISSN: 9781484328750/1018-5941 Format: Paper
Stock No: WPIEA2013208 Pages: 31
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