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Heterogeneity in Inflation Persistence and Monetary Policy in a Monetary Union

  • Séverine Menguy
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    In the context of a new Keynesian macroeconomic model, this paper studies the monetary policy that should be conducted by the common central bank of a monetary union. In the event of inflationary supply shocks, the optimal monetary policy should be all the more contractionary as the inflation inertia increases, in order to obtain the same average price level. Moreover, the increase in interest rates should be all the more accentuated as the shock affects a country which has a higher inflation inertia, and as the heterogeneity in inflation persistence between the countries of the monetary union increases.

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    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/81318/1/ARTICLE%20MENGUY%20OK.pdf
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    Article provided by ULB -- Universite Libre de Bruxelles in its journal Brussels economic review.

    Volume (Year): 52 (2009)
    Issue (Month): 2 ()
    Pages: 121-141

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    Handle: RePEc:bxr:bxrceb:2013/81318
    Contact details of provider: Web page: http://difusion.ulb.ac.be

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    1. Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo, 2009. "Teaching New Keynesian Open Economy Macroeconomics at the Intermediate Level," Munich Reprints in Economics 20213, University of Munich, Department of Economics.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Leith, Campbell & Malley, Jim, 2005. "Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe," European Economic Review, Elsevier, vol. 49(8), pages 2137-2159, November.
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    5. Jondeau, Eric & Le Bihan, Herve, 2005. "Testing for the New Keynesian Phillips Curve. Additional international evidence," Economic Modelling, Elsevier, vol. 22(3), pages 521-550, May.
    6. Stephen Cecchetti & Guy Debelle, 2005. "Has the inflation process changed?," BIS Working Papers 185, Bank for International Settlements.
    7. Jean-Guillaume Sahuc, 2002. "A 'hybrid' monetary policy model: evidence from the Euro area," Applied Economics Letters, Taylor & Francis Journals, vol. 9(14), pages 949-955.
    8. Coenen, Günter & Wieland, Volker, 2002. "Inflation dynamics and international linkages: a model of the United States, the euro area and Japan," Working Paper Series 0181, European Central Bank.
    9. Moessner, Richhild, 2005. "Optimal discretionary policy and uncertainty about inflation persistence," Working Paper Series 0540, European Central Bank.
    10. Michal Franta & Branislav Saxa & Katerina Smidkova, 2007. "Inflation Persistence in New EU Member States: Is It Different Than in the Euro Area Members?," Working Papers 2007/10, Czech National Bank, Research Department.
    11. 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.
    12. Fabio Rumler, 2005. "Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries," Working Papers 102, Oesterreichische Nationalbank (Austrian Central Bank).
    13. Moons, Cindy & Garretsen, Harry & van Aarle, Bas & Fornero, Jorge, 2007. "Monetary policy in the New-Keynesian model: An application to the Euro Area," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 879-902.
    14. Muscatelli, V. Anton & Tirelli, Patrizio & Trecroci, Carmine, 2004. "Fiscal and monetary policy interactions: Empirical evidence and optimal policy using a structural New-Keynesian model," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 257-280, June.
    15. Smets, Frank, 2003. "Maintaining price stability: how long is the medium term?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1293-1309, September.
    16. Rafael Domenech & Mayte Ledo & David Taguas, 2001. "A Small Forward-Looking Macroeconomic Model for EMU," Working Papers 0102, BBVA Bank, Economic Research Department.
    17. VAN AARLE, Bas & GARRETSEN, Harry & MOONS, Cindy, 2007. "Accession to the Euro-area: A stylized analysis using a NK model," Working Papers 2007015, University of Antwerp, Faculty of Applied Economics.
    18. Ramdane Djoudad & Céline Gauthier, 2003. "A Small Dynamic Hybrid Model for the Euro Area," Staff Working Papers 03-19, Bank of Canada.
    19. Hamid Faruqee, 2006. "Exchange Rate Pass-Through in the Euro Area," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 4.
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