The Regional Effects of Monetary Policy in Europe

Since the inception of EMU, a common concern is that European monetary policy may have differential effects on EMU member countries. However, the reliance on cross-country evidence in the empirical literature risks overemphasizing the importance of cross-country differences in monetary transmission. This paper therefore takes a regional approach. Data from 58 European regions show significant cross-regional differences in the effects of monetary policy within the five largest EU countries. For all regions combined, I find a significant relationship between the impact of monetary policy and the industrial composition of regions, supporting earlier findings for the US. I conclude that at present the large European countries are regionally well-diversified enough to minimize the risk that ECB policy will produce a markedly different impact across countries.