Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/76025 
Year of Publication: 
2002
Series/Report no.: 
CESifo Working Paper No. 705
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
What policy objective should a common central bank in a heterogeneous monetary union pursue? Should it base its decisions on the EU-wide average of inflation and growth or should it instead focus on (appropriately weighted) national welfare losses based on national rates of inflation and growth? We find that a central bank that minimises the sum of national welfare losses reacts less to common shocks. This can lead to higher average union-wide expected welfare if the variability of common shocks is large relative to the inflation bias and if idiosyncratic demand shocks in the non-tradables sector are not too high.
Subjects: 
monetary policy
monetary union
transmission mechanism
Document Type: 
Working Paper
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