DP2393 Monetary Policies In The Presence Of Asymmetries

Author(s): Paul De Grauwe
Publication Date: February 2000
Keyword(s): Asymmetric Shocks, Asymmetric Transmission, EMU, Monetary Policy
JEL(s): F33, F36, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2393

In this paper we study the theory of monetary policy when the monetary authority faces asymmetries in the countries constituting the monetary union. We identify two asymmetries (shocks and transmission) in the context of a two country model. A general finding is that as the degree of asymmetries increases, the effectiveness of stabilization of output and unemployment is reduced. As a result, when asymmetries increase, the stabilization effort of the central bank declines for given preferences about stabilisation. We also find that the central bank can improve the efficiency of its monetary policies when asymmetries in the transmission exist, by using national information in the setting of optimal policies. The declared strategy of the ECB conflicts with this prescription. In practice the ECB is likely to follow this prescription, however.