Is Monetary Policy Transmission Heterogeneous across Euro Area Countries and over Time? A Reassessment.
Working Paper Series no. 1062. We assess the degree of heterogeneity in monetary policy transmission (MPT) across euro area countries for the period 2000–2025. Using monthly local projections, we estimate the effects of monetary policy on a broad set of transmission variables at both euro area and national levels. First, we find limited heterogeneity of output and inflation responses to monetary policy shocks, despite asymmetric responses of mortgage market-related variables. Second, key structural differences, such as households’ indebtedness, debt maturity, interest rate rigidity and sectoral composition, do shape heterogeneities in MPT across euro area countries, according to our results. Considered jointly, though, these differences partly offset one another, leading to a relatively homogeneous transmission of monetary policy. Third, a monthly FAVAR estimation confirms and broadens our local projections results: asymmetry remains contained for output and inflation, but it is higher for sovereign spreads, food prices, credit variables and our consumption proxy. Finally, a rolling-window estimation of the FAVAR model shows that time-varying heterogeneity in MPT is characterized by temporary and crisis-driven divergences that consistently revert to a low baseline, reflecting key monetary policy interventions rather than deeper structural economic divergences. Unconventional monetary policies play a central role in this pattern: they tend to reduce country divergences during crisis periods, impacting more strongly the countries most affected, hence operating, by design, as a heterogeneous policy shock according to our main metric.
Figure 1. Responses of output, prices and unemployment, one year after a monetary policy shock.
Non-Technical Summary
When the European Central Bank raises or cuts interest rates, does every country in the euro area react similarly? The question is as old as the euro project itself: a monetary union is “optimal” only if cross-country divergences in the transmission of shocks are contained, so that its costs do not outweigh its benefits. The ECB itself has repeatedly acted on this concern, designing successive unconventional tools to prevent fragmentation within the euro area and ensuring effective monetary policy transmission (MPT) across euro area countries. This matters all the more because a few key structural features, such as wage-setting frameworks, lending markets characteristics or industry specialization, remain heterogeneous across countries and fiscal risk-sharing is still limited. The degree of heterogeneity in euro area MPT is therefore expected to be relatively high. Yet our results tell a different story.
We reassess this question across a wide range of variables for the eleven founding euro area members between 2000 and 2025, using two complementary approaches: local projections and a Factor Augmented VAR model. Both approaches lead to convergent conclusions: heterogeneity in MPT is lower than previously assumed, especially for output and prices. Asymmetries do exist, but they lie elsewhere, in credit quantities, in our monthly consumption proxy, sovereign spreads and food prices.
Second, we study whether key structural characteristics contribute to observed heterogeneities in MPT. Household indebtedness, debt maturity, the prevalence of fixed versus adjustable-rate loans and sectoral composition each shape how national inflation and output respond to a common monetary shock: taken individually, each of them points toward greater divergence in MPT. But considered jointly, their effects tend to offset one another: high exposure to variable-rate mortgages, for instance, can be offset by comparatively low household indebtedness or a large share of long-term loans. This offsetting is unlikely to be coincidental: national economic and financial structures may have evolved together, each compensating for the vulnerabilities created by the other. Thus, assessed one characteristic at a time, the euro area looks structurally primed for divergent transmission but assessed jointly, these effects largely cancel out, explaining why the responses of output and prices end up more homogeneous than expected.
This full-sample result, however, does not tell us whether heterogeneity has stayed stable over 2000-2025, or whether it has instead evolved. Tracking our heterogeneity measure through a rolling-window FAVAR estimation, we find no structural drift: divergence rises temporarily around major monetary policy interventions, such as the 2015 launch of large-scale asset purchases (APP) or the 2022-2023 tightening cycle, before always reverting to a low baseline. Unconventional monetary policy tools play a central role in this pattern: designed to smooth MPT within the monetary union, they do so precisely by acting, by construction, as a heterogeneous shock, impacting most strongly the countries that are most affected, for instance by compressing long-term sovereign yields disproportionately where they were initially most elevated.
Keywords: Monetary Policy Transmission, High-Frequency Identification, Local Projections, FAVAR
Codes JEL : C32, C38, F45, E52, E31
Updated on the 28th of August 2026