In a common currency area, the common central bank sets a uniform rate of inflation across countries, taking into account the area’s economic conditions. Suppose countries in recession favor a more expansionary policy than countries in expansion:whennational business cycles are not fully synchronized, a conflict of interest between members arises. If member governments have an informational advantage over the state of their domestic economy, such conflict may create an adverse selection problem: national authorities overemphasize their shocks in order to shape the common policy towards their needs. This creates an inefficiency over and above the onepolicy-fits-all cost discussed in the optimal currency area literature. In order to minimize this extra-burden of asymmetric information, monetary policy must over-react to large symmetric shocks and under-react to asymmetric shocks of different sizes.

Asymmetric Information and Monetary Policy in Common Currency Areas / L. Bottazzi; P. Manasse. - In: JOURNAL OF MONEY, CREDIT, AND BANKING. - ISSN 0022-2879. - STAMPA. - 37(4):(2005), pp. 603-621.

Asymmetric Information and Monetary Policy in Common Currency Areas

BOTTAZZI, LAURA;MANASSE, PAOLO LUCIANO ADALBERTO
2005

Abstract

In a common currency area, the common central bank sets a uniform rate of inflation across countries, taking into account the area’s economic conditions. Suppose countries in recession favor a more expansionary policy than countries in expansion:whennational business cycles are not fully synchronized, a conflict of interest between members arises. If member governments have an informational advantage over the state of their domestic economy, such conflict may create an adverse selection problem: national authorities overemphasize their shocks in order to shape the common policy towards their needs. This creates an inefficiency over and above the onepolicy-fits-all cost discussed in the optimal currency area literature. In order to minimize this extra-burden of asymmetric information, monetary policy must over-react to large symmetric shocks and under-react to asymmetric shocks of different sizes.
2005
Asymmetric Information and Monetary Policy in Common Currency Areas / L. Bottazzi; P. Manasse. - In: JOURNAL OF MONEY, CREDIT, AND BANKING. - ISSN 0022-2879. - STAMPA. - 37(4):(2005), pp. 603-621.
L. Bottazzi; P. Manasse
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/20096
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