The European Central Bank published a Working Paper under its Lamfalussy Fellowship Programme analysing how euro area financial integration affects the transmission of monetary policy to Harmonised Index of Consumer Prices (HICP) inflation and real GDP. The paper finds a continuous amplification effect whereby greater integration strengthens pass-through to both prices and output, while transmission becomes statistically and economically insignificant when integration falls to low levels around the first quartile of its historical distribution. The Working Paper reflects the authors’ views and not necessarily those of the ECB. Using a panel of euro area countries from Q1 1999 to Q4 2019 (all current members except Croatia), the study proxies integration with a quantity-based composite indicator built from intra-euro-area cross-border asset holdings across money, banking, bond and equity segments, and identifies monetary shocks via daily changes in the two-year German bond rate instrumented by high-frequency monetary surprises. For a one-standard-deviation expansionary shock (about a 6 basis point policy-rate decrease), a one-standard-deviation increase in financial integration (about 0.087 units) raises the HICP response by up to 0.18 percentage points around ten quarters after the shock and leaves a sustained price effect, while the GDP marginal effect peaks around 0.16 percentage points after one year and becomes statistically insignificant after roughly three years. In a low-versus-high integration comparison (25th vs 75th percentile, about 0.242 vs 0.377), HICP responds by around 0.04% and remains insignificant under low integration, versus an initial 0.13% and a 0.62% peak around quarter 9 under high integration, and real GDP peaks at 0.94% around quarter 4 under high integration. Core-periphery splits show stronger amplification in peripheral economies under high integration, with inflation peaking at 0.74% (vs 0.33% in the core) and output peaking at 1.07% (vs 0.75% in the core), alongside robustness checks that preserve the main results under alternative specifications, samples and measures.
European Central Bank 2025-12-10
European Central Bank publishes working paper finding financial integration strengthens monetary policy transmission in the euro area
The European Central Bank's Working Paper under the Lamfalussy Fellowship Programme examines how euro area financial integration influences monetary policy transmission to inflation and GDP. The study finds that greater integration amplifies the pass-through to prices and output, while low integration renders transmission statistically insignificant. The analysis highlights stronger effects in peripheral economies and confirms robustness across various specifications.