Synchronization and divergence: implications for central bank policies

The talk discusses the implications of the synchronization of interest rates and credit growth for central bank policy in the Euro Area. The bedrock that sustains the importance of such an issue is found in the growing evidence that monetary policy in the Euro Area has heterogeneous impacts across several dimensions, e.g. across countries, within countries, and across different bank market segments. Given policy asymmetries, it becomes essential for policy makers to quantify the extent of synchronization and divergence across interest rates and credit growth and, accordingly, tailor central bank policy to ensure its effectiveness. We investigate the synchronization of the Eurozone’s government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We describe the dynamic of credit granted across Italian provinces over the last two decades. We focus on the synchronization and divergence of the credit growth to identify for which provinces credit grows or decreases similarly and which provinces show a diverging behavior. Moreover, by decomposing credit growth into a common component and components capturing heterogeneity in supply and demand we introduce a framework to support policymaker’s choice between different types of macroprudential instruments.