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The single monetary policy and domestic macro-fundamentals: Evidence from Spain

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  • Arghyrou, Michael G.
  • Gadea, Maria Dolores

Abstract

We model pre-euro Spanish monetary policy and use our findings to assess the compatibility of the interest rates set by the ECB since 1999 with Spanish macro-fundamentals. We find that in the 1990s Spain implemented successfully a monetary strategy tailored to its own domestic fundamentals; and by abolishing it to join the euro she has paid a cost in the form of a sub-optimal monetary policy. Our findings suggest that the present turmoil in the market for Spanish government bonds is symptomatic of the risks involved in participating in a monetary union highlighted by the theory of optimum currency areas. We argue in favour of structural reforms increasing Spanish competitiveness, and a cautious approach with respect to the timing of further EMU enlargement.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 34 (2012)
Issue (Month): 1 ()
Pages: 16-34

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Handle: RePEc:eee:jpolmo:v:34:y:2012:i:1:p:16-34

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Web page: http://www.elsevier.com/locate/inca/505735

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Keywords: Spain; ECB; Monetary policy; Domestic fundamentals; Compatibility;

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Cited by:
  1. Jerger, Jürgen & Röhe, Oke, 2011. "Testing for Parameter Stability in DSGE Models. The Cases of France, Germany and Spain," University of Regensburg Working Papers in Business, Economics and Management Information Systems 453, University of Regensburg, Department of Economics.

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