What is the impact of the ECB monetary policy on the Italian economy?

Euro area monetary policy has received less academic attention than the US one, and the extent of the impact of the ECB (European Central Bank) monetary policy on the Italian economy is still uncertain. Massimiliano Marcellino (Bocconi University, Baffi Centre) and Tommaso Tornese (Catholic University of Milan) shed light on this issue in their last discussion paper for CEPR (Centre for economic and policy research), entitled “An empirical investigation of the effects of monetary polocy shocks on the Italian economy”.

Marcellino and Tornese assess empirically the effects of monetary policy shocks on the Italian economy through the lenses of a heteroskedastic SVAR (Structural Vector Autoregressive) model, extending the work by Badinger and Schiman (2023). The identifying information provided by the time variation in the volatility of the structural shocks is complemented with sign and narrative restrictions, assuming that the sign of the shock hitting the economy at carefully chosen points in time is known. 

The analysis shows that monetary policy contractions reduce inflation and output growth, generating a significant increase in the corporate bond spread. On the other hand, the response of the Euro-Dollar exchange rate and the Italy-Germany sovereign spread is not significantly affected. Indeed, the differential between the governments yields surprisingly shrinks following the monetary contraction, suggesting a smaller pass-through in the pricing of Italian long term bonds.