This paper analyses monetary policy in a stylized new-Keynesian model. A number of issues are focused upon: (i) optimal monetary policy under commitment or discretion vs. ad-hoc monetary policy based on simple rules, (ii) the effects of fiscal policies and foreign variables on monetary policy, (iii) the effects of fiscal deficit and interest rate smoothing objectives and the amount of forward-looking in the model. The model is estimated for the Euro-Area. Using simulations of the estimated model, it is analyzed how these aspects might affect monetary policy of the ECB and macro-economic fluctuations in the Euro-Area.

This article uses the Taylor rule to examine the appropriateness of European Central Bank (ECB) interest rate policy for the initial European Monetary Union (EMU) members and the 10 new EMU member states some of whom are expected to join the Eurozone in 2006-2007. Specifically it addresses three questions. (1) Are there differences between the interest rate aggregated from the Taylor interest rates of individual member states in the euro area and the interest rate set by the ECB? (2) For which countries do the desired interest rates according to the original Taylor rule and the interest rate of the euro area differ most and in which respect? (3) The last question is whether the interest rate gaps change over time. We find that the ECB's policy does not fit individual EMU members equally well and this result is unlikely to be changed with the addition of the 10 new members, which will have only a marginal effect on the ECB interest rate stance.

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Euro-area, Fiscal policy, Monetary policy, F31, F41, G15,