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The Monetary Transmission Mechanism: Evidence from Eight Economies in Transition

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  • Stephanos Papadamou
  • Georgios Oikonomou

Abstract

We examine in this paper the importance of banks' behavior in the transmission of the monetary policy to the real economy. Monthly data from eight economies in transition that recently became members of the European Union and the techniques of cointegration and Error Correction models are used, in order to investigate the relationship between intermediation margin spread (IMS, official lending rate minus deposit rate) and industrial production. Given the low development of corporate bond market and the dependence of non-financial agents on banking credits, we find that in many countries the IMS is an important leading indicator of industrial production. However, in countries characterized by credit access constraints (Estonia and Latvia) evidence for the traditional money channel is found. Evidence for both money and credit channels is found in Poland and Hungary. These results imply that a common monetary policy implemented by the European Central Bank may be transmitted in different ways across the new members of the enlarged European Union with different effects on real output in each country.

Suggested Citation

  • Stephanos Papadamou & Georgios Oikonomou, 2007. "The Monetary Transmission Mechanism: Evidence from Eight Economies in Transition," International Economic Journal, Taylor & Francis Journals, vol. 21(4), pages 559-576.
    • Handle: RePEc:taf:intecj:v:21:y:2007:i:4:p:559-576
    DOI: 10.1080/10168730701698887
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    References listed on IDEAS

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    1. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
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    Cited by:

    1. Scott W. Hegerty, 2011. "Interest-rate volatility and volatility spillovers in emerging Europe," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(5), pages 599-614, October.
    2. Taha Bahadir Sarac & OkYAY Ucan, 2013. "The Interest Rate Channel in Turkey: An Investigation with Kalman Filter Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 874-884.

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