Monetary Union of Small Open Economies: The Role of Trasparency Misperceptions
The cross-country examination of monetary policy transparency scores, economic size and supply slopes produces no clear patterns for the empirical relations in question. This evidence prompts us to formulate a general setup for the study of currency union stabilization when there is monetary policy uncertainty and structural parameters may vary. For small open economies, small size is detrimental to the relative effectiveness of the single monetary policy, while a higher degree of openness yields results that depend on the specific shock considered. A steeper supply schedule hampers monetary union stabilization performance, except under output target shocks. A stronger reaction of aggregate demand to the interest rate is likewise detrimental, except in the event of supply disturbances. The welfare implications of the central bank preference for price stability are ambiguous. Keywords: Monetary Union; Small Open Economies; Asymmetric Information; Transparency JEL Classification: D82; E52; E58; F33; F41
Volume (Year): 62 (2009)
Issue (Month): 4 ()
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