Rules Versus Discretion Under Asymmetric Shocks
Monetary policy design in currency unions faces more challenging scenarios like the presence of asymmetric shocks and the higher probability of time inconsistency. An evaluation of the union welfare under a monetary rule and under discretion in these circumstances is carried out. Assuming that the transmission of monetary policy is symmetric across countries, discretion is more desirable when the shocks show high variability and are symmetric. At the same time it is very important to implement a decision making process able to marginalize the influence of single countries, and therefore time inconsistency. A monetary rule is the best arrangement in the opposite scenario. A general consequence of these findings is that the best monetary institutional framework is to implement a rule with some escape clauses. Nevertheless, when shocks have high variability and are symmetric there are both negative and positive aspects for the rule and discretion, and a case by case analysis is necessary in order to decide whether the latter performs better than the former or vice versa.
Volume (Year): 32 (2012)
Issue (Month): 2 ()
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