Optimal Monetary Policy in a Currency Union: Implications of Country-specific Financial Frictions
| Autor: | Jakob Palek, Jochen Michaelis |
|---|---|
| Rok vydání: | 2016 |
| Předmět: |
Finance
Inflation Macroeconomics business.industry Inflation targeting media_common.quotation_subject 05 social sciences Economics Econometrics and Finance (miscellaneous) Monetary policy Discretion Monetary hegemony Taylor rule Currency union 0502 economics and business New Keynesian economics Economics Business Management and Accounting (miscellaneous) 050207 economics business Law 050205 econometrics media_common |
| Zdroj: | Credit and Capital Markets – Kredit und Kapital. 49:1-36 |
| ISSN: | 2199-1235 2199-1227 |
| DOI: | 10.3790/ccm.49.1.1 |
| Popis: | There is growing empirical evidence that the strength of financial frictions differs across countries. Using the cost channel approach, we show how the introduction of (country-specific) financial frictions alters the optimal monetary responses to union-wide and national non-financial shocks in a New Keynesian model of a two-country monetary union. By causing a cost-push effect on inflation, financial frictions make monetary policy less effective in combating inflation. We show that the optimal response to the decline in effectiveness is a stronger use of the interest-rate instrument. On the other hand, the larger the differential of financial frictions across member states, the less aggressive will the optimal monetary policy be. For almost all parameter constellations, our welfare analysis suggests a clear-cut ranking of policy regimes: commitment outperforms the Taylor rule, the Taylor rule outperforms strict inflation targeting, and strict inflation targeting outperforms discretion. Optimale ... |
| Databáze: | OpenAIRE |
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