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Independent inflation-targeting regime versus monetary union: An analysis of dynamic stability under endogenous inflation expectations

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Author Info
Dai, Meixing

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Abstract

Some countries may face choice between targeting inflation independently and entering a monetary union that targets inflation. This paper shows that the choice of a country in favour of monetary union may be motivated by asymmetrical supply shocks. The demand shocks are neutralised under these regimes and don’t explain the choice of joining a monetary union. Further, before or after the construction of the union, monetary authorities must keep a minimum concern for stabilising output around its potential in order to guarantee the dynamic stability of the economy in a framework where the central bank is assumed to be unable to perfectly control, through the manipulation of the repo interest rate, the interest rate at which the private financial and non-financial agents lend and borrow. The disappearance of national currencies can render the economy of the union unstable.

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File URL: http://mpra.ub.uni-muenchen.de/15142/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15142.

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Date of creation: Dec 2006
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Handle: RePEc:pra:mprapa:15142

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Related research
Keywords: inflation targeting; monetary union; optimal interest rate rule; asymmetrical supply shocks.;

Find related papers by JEL classification:
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February. [Downloadable!] (restricted)
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  2. Dueker, Michael & Fischer, Andreas M., 1996. "Inflation targeting in a small open economy: Empirical results for Switzerland," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 89-103, February. [Downloadable!] (restricted)
    Other versions:
  3. Frankel, Jeffrey, 1995. "The Stabilizing Properties of a Nominal GNP Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 318-34, May. [Downloadable!] (restricted)
  4. Gordon, Robert J, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter. [Downloadable!] (restricted)
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  5. Øistein RØisland & Ragnar Torvik, 2003. "Optimum Currency Areas Under Inflation Targeting," Open Economies Review, Springer, vol. 14(2), pages 99-118, April. [Downloadable!] (restricted)
  6. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. 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)
  8. Benigno, Pierpaolo & Lopez-Salido, J. David, 2006. "Inflation Persistence and Optimal Monetary Policy in the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 587-614, April. [Downloadable!] (restricted)
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  9. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May. [Downloadable!] (restricted)
  10. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Blackwell Publishing, vol. 72(3), pages 707-734, 07. [Downloadable!] (restricted)
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  11. Kai Leitemo & Oistein Roisland, 2002. "The Choice of Monetary Policy Regime for Small Open Economies," Annales d'Economie et de Statistique, ADRES, issue 67-68, pages 16, Juillet-D. [Downloadable!]
  12. Rodseth, Asbjorn, 1996. " Exchange Rate versus Price Level Targets and Output Stability," Scandinavian Journal of Economics, Blackwell Publishing, vol. 98(4), pages 559-77, December.
  13. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July. [Downloadable!] (restricted)
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  14. Canzoneri, Matthew B & Nolan, Charles & Yates, Tony, 1996. "Mechanisms for Achieving Monetary Stability: Inflation Targeting Versus the ERM," CEPR Discussion Papers 1418, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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