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Rules Versus Discretion Under Asymmetric Shocks

Author

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  • Pasquale Foresti

    () ("Magna Graecia" University of Catanzaro)

Abstract

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.

Suggested Citation

  • Pasquale Foresti, 2012. "Rules Versus Discretion Under Asymmetric Shocks," Economics Bulletin, AccessEcon, vol. 32(2), pages 1180-1190.
  • Handle: RePEc:ebl:ecbull:eb-12-00142
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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I2-P112.pdf
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    References listed on IDEAS

    as
    1. Robert Barro & Silvana Tenreyro, 2007. "Economic Effects Of Currency Unions," Economic Inquiry, Western Economic Association International, vol. 45(1), pages 1-23, January.
    2. 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.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, pages 1661-1707.
    4. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 409-436.
    5. Daniel Gros & Carsten Hefeker, 2002. "Common Monetary Policy with Asymmetric Shocks," CESifo Working Paper Series 705, CESifo Group Munich.
    6. Alesina, Alberto & Stella, Andrea, 2010. "The Politics of Monetary Policy," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 18, pages 1001-1054 Elsevier.
    7. Paul De Grauwe, 2000. "Monetary Policies in the Presence of Asymmetries," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 593-612, November.
    8. Lane, Philip R., 1996. "Stabilization policy in a currency union," Economics Letters, Elsevier, vol. 53(1), pages 53-60, October.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Pasquale Foresti, 2015. "Monetary and debt-concerned fiscal policies interaction in monetary unions," International Economics and Economic Policy, Springer, pages 541-552.

    More about this item

    Keywords

    Monetary Union; Monetary Policy; Asymmetric Shocks; Time Inconsistency.;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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