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Monetary Policy, Divergence, and the Euro

Author

Listed:
  • Moritz Pfeifer
  • Gunther Schnabl

Abstract

This paper investigates the relationship between economic divergence and expansionary monetary policies within the eurozone based on a new divergence indicator. We study the dynamics between the economic divergence of member states and unconventional monetary policy in a Bayesian SVAR and find a strong positive response of the expansion of the ECB’s balance sheet to rising divergence. We find weaker evidence for unconventional monetary policies lowering divergence. We interpret these findings as evidence that expansionary monetary policy aims to absorb shocks leading to divergence. However, it may exacerbate divergence and inflationary pressures in the long-run. This research contributes to the literature on Optimum Currency Areas (OCAs) by highlighting the dynamics between economic disparities and unconventional monetary policy.

Suggested Citation

  • Moritz Pfeifer & Gunther Schnabl, 2024. "Monetary Policy, Divergence, and the Euro," CESifo Working Paper Series 11442, CESifo.
    • Handle: RePEc:ces:ceswps:_11442
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F15 - International Economics - - Trade - - - Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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