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

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  • Dai, Meixing

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.

Suggested Citation

  • Dai, Meixing, 2006. "Independent inflation-targeting regime versus monetary union: An analysis of dynamic stability under endogenous inflation expectations," MPRA Paper 15142, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15142
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    More about this item

    Keywords

    inflation targeting; monetary union; optimal interest rate rule; asymmetrical supply shocks.;
    All these keywords.

    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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