Asymmetric Information and Monetary Policy in Common Currency Areas
AbstractIn a common currency area, the common central bank sets a uniform rate of inflation across countries, taking into account the area's economic conditions. Suppose countries in recession favor a more expansionary policy than countries in expansion: when national business cycles are not fully synchronized, a conflict of interest between members arises. If member governments have an informational advantage over the state of their domestic economy, such conflict may create an adverse selection problem: national authorities overemphasize their shocks in order to shape the common policy towards their needs. This creates an inefficiency over and above the one-policy-fits-all cost discussed in the optimal currency area literature. In order to minimize this extra-burden of asymmetric information, monetary policy must over-react to large symmetric shocks and under-react to asymmetric shocks of different sizes.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 37 (2005)
Issue (Month): 4 (August)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
Other versions of this item:
- Laura Bottazzi & Paolo Manasse, . "Asymmetric Information and Monetary Policy in Common Currency Areas," Working Papers 217, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- L. Bottazzi & P. Manasse, 2002. "Asymmetric Information and Monetary Policy in Common Currency Areas," Working Papers 444, Dipartimento Scienze Economiche, Universita' di Bologna.
- Bottazzi, Laura & Manasse, Paolo, 2002. "Asymmetric Information and Monetary Policy in Common Currency Areas," CEPR Discussion Papers 3484, C.E.P.R. Discussion Papers.
- E0 - Macroeconomics and Monetary Economics - - General
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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