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Heterogeneity in Inflation Persistence and Monetary Policy in a Monetary Union

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  • Séverine Menguy
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    Abstract

    In the context of a new Keynesian macroeconomic model, this paper studies the monetary policy that should be conducted by the common central bank of a monetary union. In the event of inflationary supply shocks, the optimal monetary policy should be all the more contractionary as the inflation inertia increases, in order to obtain the same average price level. Moreover, the increase in interest rates should be all the more accentuated as the shock affects a country which has a higher inflation inertia, and as the heterogeneity in inflation persistence between the countries of the monetary union increases.

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    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/81318/1/ARTICLE%20MENGUY%20OK.pdf
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    Bibliographic Info

    Article provided by ULB -- Universite Libre de Bruxelles in its journal Brussels economic review.

    Volume (Year): 52 (2009)
    Issue (Month): 2 ()
    Pages: 121-141

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    Handle: RePEc:bxr:bxrceb:2013/81318

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    Related research

    Keywords: New-Keynesian Model; Monetary Union; Monetary Policy; Inflation Persistence; Structural Heterogeneity;

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    References

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    1. Söderström, Ulf, 2000. "Monetary policy with uncertain parameters," Working Paper Series 0013, European Central Bank.
    2. Muscatelli, V. Anton & Tirelli, Patrizio & Trecroci, Carmine, 2004. "Fiscal and monetary policy interactions: Empirical evidence and optimal policy using a structural New-Keynesian model," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 257-280, June.
    3. Jondeau, Eric & Le Bihan, Herve, 2005. "Testing for the New Keynesian Phillips Curve. Additional international evidence," Economic Modelling, Elsevier, vol. 22(3), pages 521-550, May.
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    Cited by:
    1. Torój, Andrzej, 2009. "Solving forward-looking models of cross-country adjustment within the euro area," MF Working Papers 1, Ministry of Finance in Poland.

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