Projects

Monetary Policy Transmission in the Euro Area: The Role of Financial Imbalances

Ing. Boris Fišera, PhD.

Members of project
prof. Ing. Štefan Lyócsa, PhD., Ing. Zuzana Košťálová, PhD., prof. Roman Horváth, PhD., Ing. Martina Halousková, Ing. Boris Fišera, PhD.

• Basic informations
• Characteristics

• Duration of the project: 03/2025 - 12/2028
  ID number: VV-MVP-24-0427

• The recent inflation surge has underlined the importance of studying the transmission of monetary policy to inflation. Monetary policy tightening in the Euro Area (EA) and in most major economies in 2022-2023 was followed by a rapid disinflation with only limited output losses. While several explanations for this “soft landing” have been proposed, the role of imbalances in the financial system has remained largely unexplored. We hypothesize that the presence (absence) of financial imbalances might constrain (enhance) the ability of monetary policy to affect real variables such as inflation. We assume that the diverse inflation paths that were recently observed across the EA countries could be partly explained by varying magnitudes of financial imbalances across the EA that might have contributed to heterogeneous monetary transmission. The primary objective of this research proposal is thus to explore the effect of financial imbalances on the transmission of monetary policy in the EA, using a self-constructed financial cycle indicator (FCI) as a comprehensive measure of financial imbalances. Moreover, we also aim to construct an improved indicator of EA monetary policy shocks. Using these indicators, we aim to empirically study the conditionality of monetary policy transmission on the stage of the financial cycle. Using counterfactual analysis, we also aim to assess whether monetary policy would have been more effective if it had followed a policy rule that also responded to financial imbalances.