Central bank policy in a monetary union with heterogeneous member countries

Gian Maria Tomat ()
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Gian Maria Tomat: Bank of Italy

Empirica, 2021, vol. 48, issue 3, No 9, 759-773

Abstract: Abstract We analyse the policy of an independent central bank in a monetary union. The monetary policy equilibrium, prevailing under either discretion or commitment, is analogous to the one country case, although the stabilization policy is less than optimal for each single country in the monetary union. The extent of optimality of the monetary rule changes with the cross-country heterogeneity in economic shocks. Heterogeneity of preferences implies, that in a dynamic setting there is variation in the incentives of each member country. A country with a low target level of output or output cost weight might not reap any benefit from a deviation from the commitment equilibrium. The commitment policy can be enforced with a proper definition of the inflation expectations rule. With homogeneous preferences the advantages and disadvantages of the monetary union commitment policy relatively to the own discretionary one, for any new candidate or existing member country, are a function of its relative size and degree of asymmetry.

Keywords: Policy rules; Discretion; Credibility; Monetary union (search for similar items in EconPapers)
JEL-codes: C73 E52 F45 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10663-020-09485-3

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