Emu in Reality: The Effect of a Common Monetary Policy on Economies with Different Transmission Mechanisms

CEPR Discussion Paper Series No. 2068

Posted: 9 Jun 1999

See all articles by Andrew J. Hughes

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Laura Piscitelli

Bank of England - Monetary Analysis Division

Multiple version iconThere are 2 versions of this paper

Date Written: February 1999

Abstract

The theory of optimal currency areas states that a single currency zone should have symmetry of shocks and structures across regions. Research on monetary union in Europe has either assumed these conditions to hold close enough not to cause problems or has focused on asymmetries in shocks. But what if economic structures and/or market responses differ between countries or regions? This paper examines the consequences of a single monetary policy when there are asymmetries in a) the monetary transmissions; b) the wage/price transmissions; and c) private sector asset holdings. We find the first and last destabilize the business cycle and put countries out of phase with one another in a way that cannot be corrected by deficit constrained fiscal policies. The effect is to delay convergence.

JEL Classification: E52, E61, F42

Suggested Citation

Hughes Hallett, Andrew J. and Piscitelli, Laura, Emu in Reality: The Effect of a Common Monetary Policy on Economies with Different Transmission Mechanisms (February 1999). CEPR Discussion Paper Series No. 2068, Available at SSRN: https://ssrn.com/abstract=155955

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

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Centre for Economic Policy Research (CEPR)

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Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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Laura Piscitelli

Bank of England - Monetary Analysis Division ( email )

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London, EC2R 8AH
United Kingdom

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