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Union-wide Aggregates versus National Data Based Monetary Policies: Does it Matter for the Eurosystem?

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Author Info
De Grauwe, Paul
Piskorski, Tomasz

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Abstract

The effectiveness of alternative loss functions assigned to the common central bank of a monetary union is studied. The alternative policy objectives are a function of the degree of aggregation of decision variables. We consider, respectively, the policy based on the union-wide aggregates and the policy based on the national data of the member states. To assess the performance of two alternative policy objectives in the environment of Euroland, we derive the implied optimal linear feedback rules using the framework similar to those proposed by Rudebusch and Svensson (1999). The dynamic simulations within the calibrated model of EMU indicate that the policy based on the union-wide aggregates yields stabilization performances that are close to the policy based on the national data of the member states. The main implication of the Paper is that the announced monetary policy strategy of the ECB based on the union-wide aggregates may be a reasonable proxy of the optimal policy rule based on the national data of the member states.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3036.

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Date of creation: Nov 2001
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Handle: RePEc:cpr:ceprdp:3036

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Related research
Keywords: ECB; EMU; heterogenous monetary union; loss function; optimal linear feedback rules; welfare aggregation;

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Find related papers by JEL classification:
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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  1. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
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  3. Bayoumi, Tamim & Prasad, Eswar, 1995. "Currency Unions, Economic Fluctuations and Adjustment: Some Empirical Evidence," CEPR Discussion Papers 1172, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Aksoy, Yunus & De Grauwe, Paul & Dewachter, Hans, 2002. "Do asymmetries matter for European monetary policy?," European Economic Review, Elsevier, vol. 46(3), pages 443-469, March. [Downloadable!] (restricted)
  5. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-57, September. [Downloadable!] (restricted)
  6. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds," NBER Working Papers 4699, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers 95-6, Federal Reserve Bank of Boston. [Downloadable!]
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  9. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 205-259, 04. [Downloadable!] (restricted)
  13. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
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  14. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 15-64, 04. [Downloadable!] (restricted)
  15. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Blackwell Publishing, vol. 2(1), pages 85-116, April. [Downloadable!] (restricted)
  16. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
  17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  18. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February. [Downloadable!] (restricted)
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  19. Paul De Grauwe, 2000. "Monetary Policies in the Presence of Asymmetries," Journal of Common Market Studies, Blackwell Publishing, vol. 38(4), pages 593-612, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paolo Angelini & Paolo Del Giovane & Stefano Siviero & Daniele Terlizzese, 2008. "Monetary Policy in a Monetary Union: What Role for Regional Information?," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 1-28, September. [Downloadable!]
  2. Eric Jondeau & Jean-Guillaume Sahuc, 2008. "Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-Country Heterogeneity," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 23-72, June. [Downloadable!]
    Other versions:
  3. Fritz Breuss, 0002. "Was ECB's Monetary Policy Optimal?," WIFO Working Papers 173, WIFO. [Downloadable!]
  4. Sophocles N. Brissimis & Ifigeneia Skotida, 2007. "Optimal Monetary Policy in the Euro Area in the Presence of Heterogeneity," Working Papers 62, Bank of Greece. [Downloadable!]
    Other versions:
  5. Fritz Breuss, 2002. "Was ECB's monetary policy optimal?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(3), pages 298-319, September. [Downloadable!] (restricted)
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