Asymmetric Information and Monetary Policy in Common Currency Areas

Laura Bottazzi () and Paolo Manasse ()

No 3484, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a Common Currency Area (CCA) the Common Central Bank sets a uniform rate of inflation across countries, taking into account the area’s economic conditions. Supposing that countries in recession favor a more expansionary policy than countries in expansion, a conflict of interest between members arises when national business cycles are not fully synchronized. If governments of member countries have an informational advantage over the state of their domestic economy, such conflict may create an adverse selection problem: national authorities overemphasize their shocks, in order to shape the common policy towards their needs. This creates an inefficiency over and above the one-policy-fits-all cost discussed in the optimal currency area literature. In order to minimize this extra-burden of asymmetric information, monetary policy must over-react to large symmetric shocks and under-react to small asymmetric ones. The result is sub-optimal volatility of inflation.

Keywords: asymmetric information; common currency areas; monetary policy (search for similar items in EconPapers)
JEL-codes: E0 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mac
Date: Written 2002-08
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP3484.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Asymmetric Information and Monetary Policy in Common Currency Areas (2002)
Working Paper: Asymmetric Information and Monetary Policy in Common Currency Areas
Journal Article: Asymmetric Information and Monetary Policy in Common Currency Areas (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP3484.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().