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

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  • 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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    Bibliographic Info

    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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    References

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    1. 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.
    2. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
    3. 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.
    4. Bayoumi, Tamim & Prasad, Eswar, 1995. "Currency Unions, Economic Fluctuations and Adjustment: Some Empirical Evidence," CEPR Discussion Papers 1172, C.E.P.R. Discussion Papers.
    5. 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.
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    12. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
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    14. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    15. De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers.
    16. 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.
    17. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
    18. Yunus Aksoy, 2001. "Real Exchange Rates and Monetary Policymaking in the EMU," Computing in Economics and Finance 2001 32, Society for Computational Economics.
    19. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    Cited by:
    1. Libero Monteforte & Stefano Siviero, 2002. "The economic consequences of euro area modelling shortcuts," Temi di discussione (Economic working papers) 458, Bank of Italy, Economic Research and International Relations Area.
    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.
    3. 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.
    4. Brissimis, Sophocles N. & Skotida, Ifigeneia, 2008. "Optimal monetary policy in the euro area in the presence of heterogeneity," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 209-226, March.
    5. Egil Matsen & Øistein Røisland, 2003. "Interest Rate Decisions in an Asymmetric Monetary Union," Working Paper Series 2803, Department of Economics, Norwegian University of Science and Technology.
    6. 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.
    7. Lee, Jim, 2009. "Evaluating monetary policy of the euro area with cross-country heterogeneity: Evidence from a New Keynesian model," Economic Systems, Elsevier, vol. 33(4), pages 325-343, December.
    8. Fritz Breuss, 2002. "Was ECB's Monetary Policy Optimal?," WIFO Working Papers 173, WIFO.

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