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Asymmetric Information and Monetary Policy in Common Currency Areas

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  • Bottazzi, Laura
  • Manasse, Paolo

Abstract

In 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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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 37 (2005)
Issue (Month): 4 (August)
Pages: 603-21

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Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:4:p:603-21

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Helmuth Cremer & Maurice Marchand & Pierre Pestieau, 1996. "Interregional redistribution through tax surcharge," International Tax and Public Finance, Springer, vol. 3(2), pages 157-173, May.
  2. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
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  5. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  6. Bottazzi, Laura & Manasse, Paolo, 2002. "Credibility and Seigniorage in a Common Currency Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 1034-46, November.
  7. Lockwood, Ben, 1999. "Inter-regional insurance," Journal of Public Economics, Elsevier, vol. 72(1), pages 1-37, April.
  8. Calvo, Guillermo A & Guidotti, Pablo E, 1993. "On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 667-87, July.
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  11. repec:nsr:niesrd:25 is not listed on IDEAS
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Cited by:
  1. Robert-Paul Berben & Beata Bierut & Philipp Maier, 2012. "The role of regional information in the optimal composition of a committee," Economics Bulletin, AccessEcon, vol. 32(1), pages 510-517.
  2. De Grauwe, Paul & Senegas, Marc-Alexandre, 2006. "Monetary policy design and transmission asymmetry in EMU: Does uncertainty matter?," European Journal of Political Economy, Elsevier, vol. 22(4), pages 787-808, December.
  3. Paolo Manasse, 2007. "Deficit Limits and Fiscal Rules for Dummies," IMF Staff Papers, Palgrave Macmillan, vol. 54(3), pages 455-473, July.
  4. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 0927, European Central Bank.
  5. Paolo Manasse, 2005. "Deficit Limits, Budget Rules and Fiscal Policy," Macroeconomics 0509011, EconWPA.

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