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Monetary Policies In The Presence Of Asymmetries

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  • De Grauwe, Paul

Abstract

In this paper we study the theory of monetary policy when the monetary authority faces asymmetries in the countries constituting the monetary union. We identify two asymmetries (shocks and transmission) in the context of a two country model. A general finding is that as the degree of asymmetries increases, the effectiveness of stabilization of output and unemployment is reduced. As a result, when asymmetries increase, the stabilization effort of the central bank declines for given preferences about stabilisation. We also find that the central bank can improve the efficiency of its monetary policies when asymmetries in the transmission exist, by using national information in the setting of optimal policies. The declared strategy of the ECB conflicts with this prescription. In practice the ECB is likely to follow this prescription, however.

Suggested Citation

  • De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2393
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    References listed on IDEAS

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    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
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    7. Melitz, Jacques & Zumer, Frederic, 1999. "Interregional and international risk-sharing and lessons for EMU," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 149-188, December.
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    More about this item

    Keywords

    Asymmetric Shocks; Asymmetric Transmission; EMU; Monetary Policy;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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