In turn, this means that the responses to rate hikes are likely to be increasingly heterogeneous across euro area banks and across member countries, with associated implications for the overall impact of monetary policy tightening on the aggregate euro area economy. [22] Third, the strength of the banking channel of monetary policy plausibly differs across supply-driven and demand-driven inflationary episodes.
The fading of a temporary demand shock is associated with lower incomes and output, amplifying the transmission of monetary policy through the banking channel. In contrast, the fading out of temporary supply shocks boosts incomes and supply capacity.