Common Monetary Policy with Asymmetric Shocks
Centre for European Policy Studies, Brussels; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
HWWA Institute of International Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
CESifo Working Paper Series No. 705
What policy objective should a common central bank in a heterogeneous monetary union pursue? Should it base its decisions on the EU-wide average of inflation and growth or should it instead focus on (appropriately weighted) national welfare losses based on national rates of inflation and growth? We find that a central bank that minimises the sum of national welfare losses reacts less to common shocks. This can lead to higher average union-wide expected welfare if the variability of common shocks is large relative to the inflation bias and if idiosyncratic demand shocks in the non-tradables sector are not too high.
Number of Pages in PDF File: 20
Keywords: Monetary Policy, Monetary Union, Transmission Mechanism
JEL Classification: E52, E61, F33working papers series
Date posted: June 17, 2002
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