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Monetary Policies in the Presence of Asymmetries

  • Paul De Grauwe

In this paper we study the theory of monetary policy when the monetary authority faces asymmetries in the countries constituting the monetary union. We identify two asymmetries (shocks and transmission) in the context of a two country model. A general finding is that as the degree of asymmetries increases, the effectiveness of stabilization of output and unemployment is reduced. As a result, when asymmetries increase, the stabilization effort of the central bank declines for given preferences about stabilisation. We also find that the central bank can improve the efficiency of its monetary policies when asymmetries in the transmission exist, by using national information in the setting of optimal policies. The declared strategy of the ECB conflicts with this prescription. In practice the ECB is likely to follow this prescription, however.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1468-5965.00255
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Article provided by Wiley Blackwell in its journal Journal of Common Market Studies.

Volume (Year): 38 (2000)
Issue (Month): 4 (November)
Pages: 593-612

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Handle: RePEc:bla:jcmkts:v:38:y:2000:i:4:p:593-612
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  1. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  2. Jacques Mélitz & Frédéric Zumer, 2000. "Interregional and International Risk Sharing and Lessons for EMU," EUI-RSCAS Working Papers 2, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  3. Bennett T. McCallum, 1999. "Recent developments in the analysis of monetary policy rules," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
  4. 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.
  5. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  6. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
  7. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 15-64, 04.
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