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MONETARY POLICY IN EMU WITH ASYMMETRIC TRANSMISSION AND NON‐TRADABLE GOODS
Author(s) -
Gros Daniel,
Hefeker Carsten
Publication year - 2007
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2007.00414.x
Subject(s) - economics , inflation (cosmology) , monetary policy , monetary economics , european monetary union , macroeconomics , inflation targeting , international economics , physics , theoretical physics
ABSTRACT Which policy objective should a central bank pursue in a monetary union with asymmetric monetary transmission and different rates of inflation? Should it base its decisions on the EU‐wide average of inflation and growth or should it instead focus on (appropriately weighted) national utility losses based on national rates of inflation and growth? We find that a policy which minimises the sum of national utility losses leads to higher average utility if the variability of common shocks is large relative to idiosyncratic demand shocks in the non‐tradables sectors. We draw conclusions for the appropriate weight of common and national objectives in the union.