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European Monetary Policy in the Heterogeneous Currency Area and the Open Question of Convergence

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  • Afflatet, Nicolas
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    Abstract

    Divergent macro-economic developments within a currency area can lead to undesired distortions. That is why in the Eurozone much attention was drawn to the homogeneity of the currency area. However, at the beginning the Eurozone seemed to be too heterogeneous for a common currency. So many hopes relied on a convergent development under the common currency so that the single monetary policy would meet the needs of all member countries. Based on the Taylor rule this article shows that these needs differ a lot within the currency union. Stationarity tests investigate whether the differences in inflation and growth rates have diminished. In this case, the single monetary policy would rather meet the monetary needs of the member countries. On the one hand, (partially small) hints for convergence can be found for several countries. On the other hand divergent developments can be assessed for others. These results lead to the conclusion that the single monetary policy will not meet the needs of all member countries in the foreseeable future. This should cause some concerns. As a result, the member countries should orientate their policies on measures which contribute to the efficiency of the currency area. --

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    Bibliographic Info

    Paper provided by ZBW - German National Library of Economics in its series EconStor Preprints with number 93382.

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    Date of creation: Mar 2014
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    Handle: RePEc:zbw:esprep:93382

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    Keywords: Taylor rule; convergence; divergence; time series tests; stationarity; currency area; single monetary policy;

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    1. Fabio Busetti & Lorenzo Forni & Andrew Harvey & Fabrizio Venditti, 2007. "Inflation Convergence and Divergence within the European Monetary Union," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 95-121, June.
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