MONETARY POLICY IN EMU WITH ASYMMETRIC TRANSMISSION AND NON‐TRADABLE GOODS
| Date | 01 May 2007 |
| DOI | http://doi.org/10.1111/j.1467-9485.2007.00414.x |
| Author | Daniel Gros,Carsten Hefeker |
| Published date | 01 May 2007 |
MONETARY POLICY IN EMU WITH
ASYMMETRIC TRANSMISSION AND
NON-TRADABLE GOODS
Daniel Gros
n
and Carsten Hefeker
nn
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.
I Intro ductio n
Common monetary policy for the euro-area confronts a number of problems.
The economies of the common currency area show a considerable degree of
asymmetric structures and shocks (Fidrmuc and Korhonen, 2003). Owing to
these asymmetries, member countries show divergence in the rates of domestic
inflation, the rate of growth, the output gap and unemployment. In addition,
there is some evidence that the transmission of the common monetary policy still
exhibits asymmetries, which further complicates the design of a common policy.
These asymmetries are likely to even increase with an enlargement of monetary
union.
Should the European Union (EU)’s monetary authority, the European
Central Bank (ECB), react to these divergences? The standard answer is it
should not because the ECB is held responsible only for the performance of the
entire euro zone. However, as in some countries the performance diverges
considerably from the average, those countries are not served appropriately by a
one size fits all policy. While it is impossible to have a nationally differentiated
monetary policy in a monetary union, the question is nevertheless whether
n
Centre for European Policy Studies
nn
University of Siegen
Scottish Journal of Political Economy, Vol. 54, No. 2, May 2007
r2007 The Authors
Journal compilation r2007 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
268
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