Monetary policy design and transmission asymmetry in EMU: Does uncertainty matter?

Fiscal and monetary interaction under monetary policy uncertainty

“…See alsoGiuli (2010) for the case of Knightian uncertainty.6 See e.g Lane (2003),. DeGrauwe and Sénégasb (2006) and references therein. 7 However, note that the model does not explicitly include interest rates and public debt.…”

Monetary and Fiscal Policies Interaction in Monetary Unions

“…Galí and Monacelli (2008) and Beetsma and Jensen (2005) agree with this result, but they show that this is optimal only if fiscal policies pose no inflationary pressures on the union as a whole and stabilize relative inflation. Furthermore, De Grauwe (2000) and De Grauwe and Sénégas (2006) show that by using national information the central bank can improve the efficiency of its policy setting when there are asymmetries in the monetary policy transmission mechanisms. De Grauwe and Sénégas (2004) follow the same reasoning and show how the enlargement of the EMU requires that the ECB takes into account national data as the degree of asymmetry should increase together with the entrance of new member countries.…”

Monetary Policy in Emu With Asymmetric Transmission and Non‐tradable Goods

“…We find that the existence of such divergences is important for the results of our theoretical analysis. Whereas the earlier literature had concluded that individual countries' welfare and the expected welfare of the European countries in average can be increased if the ECB does not only focus on average developments (Gros and Hefeker, 2002; De Grauwe and Senegas, 2003), this result is qualified through the influence of demand shocks to non‐tradable goods. A central bank taking national developments into account will react to these shocks, whereas an institution being concerning with European wide developments is likely not to do so.…”

“…They found that an increase in asymmetries and divergences could be expected due to asymmetric transmission and that fiscal policy could not compensate for the loss of independent monetary policy. De Grauwe and Senegas (2003, 2004) have looked at how asymmetries should be treated in general and how the ECB should react if transmission is not only asymmetric but also partly unknown. They find that European member states as a whole are likely to be better off if common monetary policy takes national divergences from average developments stronger into account than a simple averaging policy would do 1 .…”