Structural shifts reshape monetary policy transmission

The research reveals that monetary policy transmission in the euro area is highly state-dependent, varying systematically with structural changes.

For instance, more service-intensive economies exhibit weaker real responses to monetary tightening compared to manufacturing, due to lower reliance on physical capital and prevalence of long-term contracts.

Conversely, high-inflation environments and periods of elevated financial leverage amplify transmission, making price and wage dynamics more responsive to monetary tightening.

This helps explain why the recent disinflation episode in the euro area occurred faster and with lower output costs than historical patterns suggested.

The paper also highlights that firms' price-setting behaviour is not uniform, influenced by organisational differences, production network positions, and global value chain exposures.

Furthermore, financial frictions, particularly for small, bank-dependent firms, significantly condition transmission, while larger firms with limited external financing needs show dampened responses.

These findings underscore that the inflation-output trade-off is not constant, but contingent on the source and persistence of shocks, especially those originating abroad or related to energy.

The paper summarises research from the ESCB ChaMP Research Network, an initiative revisiting monetary transmission channels in European economies.

This was prompted by unprecedented shocks and ongoing structural changes over the past decade and a half, including the 2021-23 inflation episode.

Key structural transformations include digitalisation, a long-term shift towards services, demographic pressures, geopolitical realignments, and the climate and energy transition.

These developments are not mere background conditions but actively reshape production structures, competitive dynamics, and the distribution of economic activity.

The ChaMP network's two workstreams focused on transmission via the financial system (banks, households, non-banks) and the real economy (input-output linkages, structural changes).