Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism

By Cecchetti, Stephen G. | Federal Reserve Bank of New York Economic Policy Review, July 1999 | Go to article overview

Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism


Cecchetti, Stephen G., Federal Reserve Bank of New York Economic Policy Review


Over the past decade, the countries of central Europe have become more alike in many ways. As the new members of the European Monetary Union (EMU) prepared for the birth of the euro on January 1, 1999, their economic policies became substantially more uniform. All eleven countries in the new euro area have virtually eliminated inflation and taken serious steps toward fiscal consolidation.(1) As their monetary and fiscal policies have adjusted to meet these common goals, the countries' business cycle fluctuations appear to have become more synchronized as well.(2) While this makes the job of the Eurosystem (the European Central Bank plus the central banks of the eleven monetary union member countries) easier, numerous difficult challenges remain. Primary among these is the making of policy in the face of the possibility that it will have differential impacts across the countries of the euro area.

The task facing the Eurosystem is even more complex than that facing countries with stable monetary regimes, where the measurement of the national and regional impact of policy has already proved to be extremely difficult. The creation of the Eurosystem constitutes a regime shift in virtually every sense of the term. The introduction of the euro seems sure to prompt adjustments in the economies of the member countries, and these adjustments will probably alter the relationship between the actions of the central bank and the real economy. That is, the monetary transmission mechanism of the countries in the euro area will change, making the job of the new European Central Bank even more difficult than it is already. But how quickly will it change, and what will it become?

To answer these questions, we must understand the fundamental determinants of the impact of policy actions on output and inflation. For insight into these determinants, I turn to the modern views of the monetary transmission mechanism, which assign a central role to financial structure. Kashyap and Stein (1997) provide a starting point; they focus on the importance of the banking system and go on to emphasize the distributional effects of monetary policy changes. The conventional wisdom has always been that some industries are more sensitive to interest rate changes than others, and so changes in policy-controlled interest rates have differential effects across industries. The view based on financial structure both formalizes this reasoning and takes it one step further by noting that some firms are more dependent on banks for financing than others, and that this is true both across and within industries. According to this "lending view" of the transmission mechanism, monetary policy actions change the reserves available to the banking system, thereby affecting the willingness of banks to lend and, ultimately, the supply of loans. How this mechanism will affect individual firms depends on the financing methods available to them. Monetary policy has a bigger impact on firms that are reliant on banks for their financing. Furthermore, healthier banks will be able to adjust to the policy-induced reserve changes more easily than other banks will.

The distributional effects implied by the lending view of monetary policy transmission have clear implications for the euro area and the Eurosystem. Countries in which firms are more bank dependent and banking systems are less healthy will be more sensitive to the Eurosystem's decisions to change interest rates. This brings me to the first question I will address in this paper: Is there evidence that the impact of monetary policy innovations varies across countries with the strength and scope of the banking system?

With this in mind, I examine differences in the size, concentration, and health of national banking systems, as well as in the availability of nonbank sources of finance. I find, consistent with the most casual observation, that banking system characteristics vary dramatically across the countries of the European Union (EU). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.