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The single monetary policy and domestic macro-fundamentals: Evidence from Spain

  • Arghyrou, Michael G.
  • Gadea, Maria Dolores

We model pre-euro Spanish monetary policy and use our findings to assess the compatibility of the interest rates set by the ECB since 1999 with Spanish macro-fundamentals. We find that in the 1990s Spain implemented successfully a monetary strategy tailored to its own domestic fundamentals; and by abolishing it to join the euro she has paid a cost in the form of a sub-optimal monetary policy. Our findings suggest that the present turmoil in the market for Spanish government bonds is symptomatic of the risks involved in participating in a monetary union highlighted by the theory of optimum currency areas. We argue in favour of structural reforms increasing Spanish competitiveness, and a cautious approach with respect to the timing of further EMU enlargement.

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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 34 (2012)
Issue (Month): 1 ()
Pages: 16-34

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Handle: RePEc:eee:jpolmo:v:34:y:2012:i:1:p:16-34
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