Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/105074 
Year of Publication: 
2014
Series/Report no.: 
MAGKS Joint Discussion Paper Series in Economics No. 44-2014
Publisher: 
Philipps-University Marburg, Faculty of Business Administration and Economics, Marburg
Abstract: 
There is growing empirical evidence that the strength of the cost channel of monetary policy differs across countries. Using a New Keynesian model of a two-country monetary union, we show how the introduction of a cost channel (differential) alters the optimal monetary responses to union-wide and national shocks. The cost channel makes monetary policy less effective in combating inflation, but it is shown that the optimal response to the decline in effectiveness is a stronger use of the instrument. On the other hand, the larger the cost channel differential, the less aggressive will the optimal monetary policy be. For almost all para- meter 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.
Subjects: 
cost channel
optimal monetary policy
monetary union
open economy macroeconomics
JEL: 
E31
E52
F41
Document Type: 
Working Paper

Files in This Item:
File
Size
591.83 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.