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Interest rate control and the transmission of monetary policy

Author

Listed:
  • Holm-Hadulla, Fédéric
  • Pool, Sebastiaan

Abstract

We study how short-term interest rate volatility affects the transmission of monetary policy. To identify exogenous changes in volatility, we exploit the pronounced heteroskedasticity visible in the time-series of euro area short-term rates over the past two and a half decades. Interacting the exogenous variation in volatility with high-frequency-identified monetary policy shocks, we find that increases in volatility dampen the effects of monetary policy on output and prices. This dampening effect is visible already at the earlier stages of transmission, including in the pricing and volume of bank lending. JEL Classification: E44, E52, E58

Suggested Citation

  • Holm-Hadulla, Fédéric & Pool, Sebastiaan, 2025. "Interest rate control and the transmission of monetary policy," Working Paper Series 3048, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253048
    Note: 1624014
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    More about this item

    Keywords

    interest rate volatility; monetary policy implementation; monetary policy transmission;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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