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Optimal Monetary Policy in a Currency Union: Implications of Country-specific Financial Frictions
Michaelis, Jochen | Palek, Jakob
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 1 : pp. 1–36
2 Citations (CrossRef)
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Prof. Dr. Jochen Michaelis, University of Kassel, Department of Economics, Nora-Platiel-Str. 4, D-34127 Kassel, Germany, Tel.: + 49 (0) 561-804-3562, Fax: + 49 (0) 561-804-3083
Dr. Jakob Palek, University of Kassel, Department of Economics, Nora-Platiel-Str. 4, D-34127 Kassel, Germany, Tel.: + 49 (0) 561-804-3085
Cited By
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Financial frictions and optimal stabilization policy in a monetary union
Palek, Jakob | Schwanebeck, BenjaminEconomic Modelling, Vol. 61 (2017), Iss. P.462
https://doi.org/10.1016/j.econmod.2016.12.024 [Citations: 8] -
Optimal monetary and macroprudential policy in a currency union
Palek, Jakob | Schwanebeck, BenjaminJournal of International Money and Finance, Vol. 93 (2019), Iss. P.167
https://doi.org/10.1016/j.jimonfin.2019.01.008 [Citations: 7]
Abstract
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.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Jochen Michaelis / Jakob Palek: Optimal Monetary Policy in a Currency Union: Implications of Country-specific Financial Frictions | 1 |