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Monetary policy and growth-at-risk: the role of institutional quality

Author

Listed:
  • Emter, Lorenz
  • Setzer, Ralph
  • Zorell, Nico
  • Moura, Afonso S.

Abstract

This paper analyses how country-specific institutional quality shapes the impact of monetary policy on downside risks to GDP growth in the euro area. Using identified high-frequency shocks in a growth-at-risk framework, we show that monetary policy has a higher impact on downside risks in the short term than in the medium term. However, this result for the euro area average hides significant heterogeneity across countries. In economies with weak institutional quality, medium-term growth risks increase substantially following contractionary monetary policy shocks. In contrast, these risks remain relatively stable in countries with high institutional quality. This suggests that improvements in institutional quality could significantly enhance euro area countries’ economic resilience and support the smooth transmission of monetary policy. JEL Classification: C23, E52, F45, G28, O43

Suggested Citation

  • Emter, Lorenz & Setzer, Ralph & Zorell, Nico & Moura, Afonso S., 2024. "Monetary policy and growth-at-risk: the role of institutional quality," Working Paper Series 2989, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242989
    Note: 1128184
    as

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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Euro area; growth-at-risk; institutional quality; monetary policy transmission;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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