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Optimal Monetary Policy in a Currency Union: The Role of the Cost Channel
In this paper we introduce the cost channel of monetary policy (e.g., Ravenna and Walsh, 2006) into an otherwise standard New Keynesian model of a two-country monetary union, which is being hit by aggregate, asymmetric and idiosyncratic shocks. The single central bank implements the optimal disc...
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| Published in: | MAGKS - Joint Discussion Paper Series in Economics (Band 03-2012) |
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| Main Author: | |
| Format: | Work |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | PDF Full Text |
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| Summary: | In this paper we introduce the cost channel of monetary policy (e.g.,
Ravenna and Walsh, 2006) into an otherwise standard New Keynesian
model of a two-country monetary union, which is being hit by aggregate,
asymmetric and idiosyncratic shocks. The single central bank implements
the optimal discretionary monetary policy by setting the union interest
rate.The cost channel makes monetary policy less effective in combatting
inflation, but it is shown that the optimal response to the decline in e¤ec-
tiveness is a stronger use of the instrument. Moreover, we show how the
sign of the spillover e¤ects of idiosyncratic shocks depends on the strength
of the cost channel. If the cost channel exceeds a well-defined threshold,
then the interest rate turns into a supply-side instrument. |
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| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2024.0118 |