Transmission Asymmetry, Additive Uncertainty, and Monetary Stabilization Policy in the Eurozone: Lessons from a Theoretical Model
De Grauwe, Paul
Transmission Asymmetry, Additive Uncertainty, and Monetary Stabilization Policy in the Eurozone: Lessons from a Theoretical Model - 2007.
15
This paper examines, from a theoretical standpoint, how uncertainty affects the choice between a federal monetary policy based on national data and a policy based on union-wide aggregated data in a monetary union with asymmetrical monetary-policy transmission. We find that when additive uncertainty is introduced, the difference in the forecasting processes matters. In particular, if union-wide forecasting is more accurate than national forecasting, this can compensate the welfare loss arising from the use of union-wide aggregation. We conclude, however, that there is a strong case for using national information in the optimal design of the common monetary policy.
Transmission Asymmetry, Additive Uncertainty, and Monetary Stabilization Policy in the Eurozone: Lessons from a Theoretical Model - 2007.
15
This paper examines, from a theoretical standpoint, how uncertainty affects the choice between a federal monetary policy based on national data and a policy based on union-wide aggregated data in a monetary union with asymmetrical monetary-policy transmission. We find that when additive uncertainty is introduced, the difference in the forecasting processes matters. In particular, if union-wide forecasting is more accurate than national forecasting, this can compensate the welfare loss arising from the use of union-wide aggregation. We conclude, however, that there is a strong case for using national information in the optimal design of the common monetary policy.
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