The monetary transmission mechanism: evidence and implications for European Monetary Union

We provide some evidence consistent with a heterogeneous credit channel of monetary policy transmission in the European Union. Using the techniques of cointegration and Error Correction Models, we have shown that the external finance premium is one important leading indicator of real economic activi ty in Germany and Italy. No evidence is found for France and the UK. Theref ore, a common monetary policy implemented by the European Central Bank migh t be transmitted in different ways across the member countries of the monet ary union, thus exacerbating existing regional disparities among the member countries. (C) 2001 Elsevier Science B.V. All rights reserved.