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Central bank policy in a monetary union with heterogeneous member countries

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  • Gian Maria Tomat

    (Bank of Italy)

Abstract

We analyse the policy of an independent central bank in a monetary union. The monetary policy equilibrium, prevailing under either discretion or commitment, is analogous to the one country case, although the stabilization policy is less than optimal for each single country in the monetary union. The extent of optimality of the monetary rule changes with the cross-country heterogeneity in economic shocks. Heterogeneity of preferences implies, that in a dynamic setting there is variation in the incentives of each member country. A country with a low target level of output or output cost weight might not reap any benefit from a deviation from the commitment equilibrium. The commitment policy can be enforced with a proper definition of the inflation expectations rule. With homogeneous preferences the advantages and disadvantages of the monetary union commitment policy relatively to the own discretionary one, for any new candidate or existing member country, are a function of its relative size and degree of asymmetry.

Suggested Citation

  • Gian Maria Tomat, 2021. "Central bank policy in a monetary union with heterogeneous member countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(3), pages 759-773, August.
    • Handle: RePEc:kap:empiri:v:48:y:2021:i:3:d:10.1007_s10663-020-09485-3
    DOI: 10.1007/s10663-020-09485-3
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    References listed on IDEAS

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    Cited by:

    1. Hao Dong & Yingrong Zheng & Na Li, 2023. "Analysis of Systemic Risk Scenarios and Stabilization Effect of Monetary Policy under the COVID-19 Shock and Pharmaceutical Economic Recession," Sustainability, MDPI, vol. 15(1), pages 1-32, January.

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    More about this item

    Keywords

    Policy rules; Discretion; Credibility; Monetary union;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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