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Foreign price shocks and monetary policy in an asymmetric monetary union

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  • Wohltmann, Hans-Werner
  • Clausen, Volker

Abstract

This paper analyzes the dynamic effects of anticipated and unanticipated foreign price increases of imported raw materials for a small two-country monetary union, which is simultaneously characterized by asymmetric wage adjustments and asymmetric interest rate sensitivities of private absorption. It is shown that both types of input price disturbances lead to temporary divergences in output developments across the monetary union. In the case of anticipated materials price increases the relative cyclical position of output effects is reversed in the course of the adjustment process. With anticipated input price increases complete stabilization of the output variables throughout the overall adjustment process requires restrictive monetary policy to be time-inconsistent from a quantitative but time-consistent from a qualitative point of view. That means that the central bank credibly announces a future reduction in the growth rate of nominal money stock but actually realizes a decrease in the monetary growth rate, which is less restrictive than the announcement. --

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Bibliographic Info

Paper provided by University of Duisburg-Essen, Faculty for Economics and Business Administration in its series IBES Diskussionsbeiträge with number 124.

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Date of creation: 2002
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Handle: RePEc:zbw:udewwd:124

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Postal: Universitätsstrasse 12, 45117 Essen
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Web page: http://www.wiwi.uni-due.de/en/
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Related research

Keywords: EMU; international policy transmission; oil price shock; time inconsistency;

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References

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  1. van der Ploeg, Frederick, 1987. "International Interdependence and Policy Coordination in Economies with Real and Nominal Wage Rigidity," CEPR Discussion Papers 217, C.E.P.R. Discussion Papers.
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Cited by:
  1. Clausen, Volker & Wohltmann, Hans-Werner, 2005. "Monetary and Fiscal Policy in a Large Asymmetric Monetary Union - A Dynamic Three-Country Analysis," Economics Working Papers 2005,18, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Wohltmann, Hans-Werner & Clausen, Volker, 2003. "Oil Price Shocks and Monetary Policy in an Asymmetric Monetary Union§," Economics Working Papers 2003,11, Christian-Albrechts-University of Kiel, Department of Economics.
  3. Greß, Stefan, 2004. "Competition in Social Health Insurance: A Three-Country Comparison," IBES Diskussionsbeiträge 135, University of Duisburg-Essen, Faculty for Economics and Business Administration.

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