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Interest Rate Decisions in an Asymmetric Monetary Union

  • Egil Matsen

    ()

    (Department of Economics, Norwegian University of Science and Technology)

  • Øistein Røisland

    ()

    (Central Bank of Norway)

Decision rules matter for monetary policy in a currency union if the interest rate affects member states differently. We examine the consequences for inflation, output and interest rate fluctuations and the welfare loss of four alternative types of decision procedures. We show that the alternative decision rules have very dissimilar properties and that different rules favour different types of countries. In addition to asymmetric transmission mechanisms, we consider asymmetric shocks. We show that it is the combination of a country’s interest rate elasticity and the covariance between the shocks to the country and the shocks to the union that determines which decision rule the country would favour.

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Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 2803.

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Length: 21 pages
Date of creation: 10 Jul 2003
Date of revision:
Handle: RePEc:nst:samfok:2803
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