The single monetary policy and domestic macro-fundamentals: Evidence from Spain

Michael Arghyrou and María Gadea ()

Journal of Policy Modeling, 2012, vol. 34, issue 1, 16-34

Abstract: We model pre-euro Spanish monetary policy and use our findings to assess the compatibility of the interest rates set by the ECB since 1999 with Spanish macro-fundamentals. We find that in the 1990s Spain implemented successfully a monetary strategy tailored to its own domestic fundamentals; and by abolishing it to join the euro she has paid a cost in the form of a sub-optimal monetary policy. Our findings suggest that the present turmoil in the market for Spanish government bonds is symptomatic of the risks involved in participating in a monetary union highlighted by the theory of optimum currency areas. We argue in favour of structural reforms increasing Spanish competitiveness, and a cautious approach with respect to the timing of further EMU enlargement.

Keywords: Spain; ECB; Monetary policy; Domestic fundamentals; Compatibility (search for similar items in EconPapers)
JEL-codes: C51 C52 E43 E58 F37 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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Working Paper: The single monetary policy and domestic macro-fundamentals: Evidence from Spain (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:34:y:2012:i:1:p:16-34

DOI: 10.1016/j.jpolmod.2011.09.002

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