The process of European monetary integration has prompted interest in the study of differences in financial systems and their consequences for monetary transmission mechanisms. This paper analyses the case of a monetary union composed of countries with heterogeneous "credit channels". In order better to insulate the economies from the asymmetric effects produced by differences in national financial systems, a money supply process based on the interest rate on bonds and its spread with respect to the bank lending rate is proposed. Using a two-country rational expectations model, this study highlights the properties of the optimal monetary instrument with respect to a wide range of stochastic disturbances.
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Find related papers by JEL classification: E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
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