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Evaluating monetary policy of the euro area with cross-country heterogeneity: Evidence from a New Keynesian model

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  • Lee, Jim

Abstract

This paper empirically investigates the optimal monetary policy conduct for the euro area in the presence of heterogeneous economic conditions across member states. Based on the New Keynesian monetary framework, we compare welfare losses under the assumption that the central bank conducts monetary policy using area-wide aggregate data against the alternative assumption that the central bank exploits country-specific as opposed to area-wide data. Empirical results reveal a sizable gain in stabilization performance if the European Central Bank formulates monetary policy by explicitly taking into account cross-country heterogeneity within the euro area. The estimated gain is more pronounced in a hybrid variant than in the purely forward-looking version of the New Keynesian model.

Suggested Citation

  • Lee, Jim, 2009. "Evaluating monetary policy of the euro area with cross-country heterogeneity: Evidence from a New Keynesian model," Economic Systems, Elsevier, vol. 33(4), pages 325-343, December.
  • Handle: RePEc:eee:ecosys:v:33:y:2009:i:4:p:325-343
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    Cited by:

    1. Jürgen Jerger & Oke Röhe, 2014. "Testing for parameter stability in DSGE models. The cases of France, Germany, Italy, and Spain," International Economics and Economic Policy, Springer, vol. 11(3), pages 329-351, September.
    2. Jovanovic, Branimir & Petreski, Marjan, 2012. "Monetary policy in a small open economy with fixed exchange rate: The case of Macedonia," Economic Systems, Elsevier, vol. 36(4), pages 594-608.
    3. Jürgen Jerger & Oke Röhe, 2009. "Testing for Parameter Stability in DSGE Models. The Cases of France, Germany and Spain," Working Papers 276, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies), revised Mar 2011.
    4. Czudaj, Robert, 2011. "P-star in times of crisis - Forecasting inflation for the euro area," Economic Systems, Elsevier, vol. 35(3), pages 390-407, September.
    5. Schäfer, Benjamin, 2016. "Monetary union with sticky prices and direct spillover channels," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 99-118.

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