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Monetary Policy in a Currency Union with National Price Asymmetries

  • Sandra Gomes

We investigate the importance of the behaviour of the monetary authority for the dynamics of a currency union where cross-country asymmetries are not necessarily reflected in differences in economic size. We construct a stylised two-country general equilibrium model with sticky-prices to serve as laboratory for studying the operating characteristics of Taylor-type interest rate rules. We consider that the two countries in the union are different in terms of the price-setting practices of firms, and inspect the implications of alternative policy rules for the dynamics of the economy. The experiments carried out show, in general, that the way shocks propagate in the monetary union is linked to the systematic behaviour of the monetary authority. The reaction of the central bank to economic developments is important both at the union level and at the country level, namely to explain cross-country differences in economic behaviour. On the other hand, in our model the policy that stabilizes inflation is not necessarily the same that makes the output in the union less volatile. Also, the policy that reduces aggregate volatility does not necessarily imply the same for each country individually.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200416.

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Date of creation: 2004
Handle: RePEc:ptu:wpaper:w200416
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  1. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics 0402020, EconWPA.
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  14. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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  18. Javier Andrés & Eva Ortega & Javier Vallés, 2003. "Market structure and inflation differentials in the European Monetary Union," Working Papers 0301, Banco de España;Working Papers Homepage.
  19. Rochelle M. Edge, 2001. "Online Appendix to "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models"," Technical Appendices edge01, Review of Economic Dynamics.
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