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Monetary Policies in the Presence of Asymmetries
Author(s) -
De Grauwe Paul
Publication year - 2000
Publication title -
jcms: journal of common market studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.54
H-Index - 90
eISSN - 1468-5965
pISSN - 0021-9886
DOI - 10.1111/1468-5965.00255
Subject(s) - economics , monetary policy , context (archaeology) , unemployment , monetary economics , central bank , information asymmetry , monetary transmission mechanism , macroeconomics , inflation targeting , credit channel , microeconomics , paleontology , biology
In this article 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 stabilization. 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. However, in practice the ECB is likely to follow this prescription.