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Simulating the European economies under alternative monetary policy assumptions
Author(s) -
Richardson Pete
Publication year - 1992
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.3980110506
Subject(s) - economics , exchange rate flexibility , exchange rate , monetary policy , shock (circulatory) , linkage (software) , monetary economics , currency , spillover effect , flexibility (engineering) , macroeconomics , demand shock , exchange rate regime , international economics , medicine , biochemistry , chemistry , management , gene
This paper examines the implications of alternative monetary policy rules for economic stabilization within Europe, using the OECD world model, INTERLINK. The results suggest that policy linkage through the Exchange Rate Mechanism will have differing effects on the effectiveness of stabilization policies depending on the nature of economic shocks. For demand shocks, the choice of monetary rule in the country of the ‘anchor’ currency is of more consequence than the flexibility of exchange rates. For supply shocks, exchange rate rigidity is likely to have more problematic effects on economic adjustment. Spillover effects are also important when the shock is felt primarily by the ‘anchor’ economy.