Missing Imports in the Euro Area: Domestic Monetary Policy, Cross-Border Synchronization, and Demand Composition

IMF Working Papers, July 4, 2025

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Canonical URL: Missing Imports in the Euro Area: Domestic Monetary Policy, Cross-Border Synchronization, and Demand Composition

Authors: Francesca Caselli, Allan Dizioli
Publication date: July 4, 2025
Series: IMF Working Papers, Working Paper No. 2025/140
Pages: 45
Volume: 2025; Issue: 140
DOI: https://doi.org/10.5089/9798229015790.001
Stock No: WPIEA2025140
ISBN: 9798229015790
ISSN: 1018-5941
Central research question: How does central bank interest rate policy affect the economy’s trade position via domestic demand composition, and to what extent did this channel contribute to the euro area’s 2023 import contraction?

The paper identifies a monetary transmission channel linking central bank interest rate policy to the economy’s trade position through shifts in domestic demand composition.
In 2023, the euro area experienced a significant contraction in imports despite resilient GDP growth, posing a challenge to traditional import elasticity models.
An import intensity-adjusted demand framework explains the Great Financial Crisis (GFC) trade-GDP disconnect but does not account for the euro area’s 2023 import shortfall, indicating additional factors are at play.
Incorporating lending rates into regression analysis significantly improves explanatory power for the 2023 period, highlighting the role of monetary policy in recent import declines.
Local projection methods using high-frequency monetary policy shocks confirm that monetary tightening negatively impacts imports by suppressing demand components with higher import intensity.
The negative effect of monetary tightening on imports is amplified when accounting for cross-border synchronization of monetary policy.

Regression analysis with import intensity-adjusted demand framework for historical comparisons (including GFC period).
Extensions to the baseline model that include lending rates to capture monetary policy effects on import dynamics.
Local projection methods with high-frequency monetary policy shocks to identify the dynamic response of imports and demand components to monetary tightening.
Analysis of cross-border synchronization to assess amplification of monetary policy effects on imports across countries in the euro area.

Monetary tightening can reduce imports disproportionately by contracting demand categories that have higher import intensity.
Lending rates are a key channel through which monetary policy influences import performance, beyond what standard demand-adjusted models capture.
Cross-border synchronization of monetary policy amplifies the import-suppressing effects of domestic tightening, suggesting a regional dimension to import volatility in a currency union.

Policymakers should account for the demand-composition channel when assessing the external effects of domestic monetary policy, particularly in regions with synchronized policy actions.
Monitoring lending rates and demand components with high import intensity may improve early detection of import shortfalls not predicted by standard elasticity models.
Coordination and communication across jurisdictions in a monetary union may mitigate amplified cross-border effects on trade induced by synchronized monetary tightening.

Subject: Consumption, Demand elasticity, Economic theory, Exports, Imports, International trade, Monetary policy, Monetary tightening, National accounts
Keywords: Consumption, Demand Composition, Demand elasticity, demand framework, Euro Area, Exports, Global, Imports, influence import dynamics, International trade, Monetary policy, monetary policy shock, Monetary policy synchronization, monetary policy tightening, Monetary tightening

Source: IMF Working Paper No. 2025/140 (July 4, 2025), Francesca Caselli and Allan Dizioli.