Union-wide Aggregates versus National Data Based Monetary Policies: Does it Matter for the Eurosystem?

Paul De Grauwe and Tomasz Piskorski

No 3036, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The effectiveness of alternative loss functions assigned to the common central bank of a monetary union is studied. The alternative policy objectives are a function of the degree of aggregation of decision variables. We consider, respectively, the policy based on the union-wide aggregates and the policy based on the national data of the member states. To assess the performance of two alternative policy objectives in the environment of Euroland, we derive the implied optimal linear feedback rules using the framework similar to those proposed by Rudebusch and Svensson (1999). The dynamic simulations within the calibrated model of EMU indicate that the policy based on the union-wide aggregates yields stabilization performances that are close to the policy based on the national data of the member states. The main implication of the Paper is that the announced monetary policy strategy of the ECB based on the union-wide aggregates may be a reasonable proxy of the optimal policy rule based on the national data of the member states.

Keywords: Welfare aggregation; Heterogenous monetary union; Loss function; Optimal linear feedback rules; Ecb; Emu (search for similar items in EconPapers)
JEL-codes: E10 E30 E40 E50 (search for similar items in EconPapers)
Date: 2001-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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