Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-26T09:06:31.028Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL MONETARY POLICY FOR THE EMU ACCESSION COUNTRIES. A NEW KEYNESIAN APPROACH

Published online by Cambridge University Press:  06 June 2014

Anna Lipińska
Anna Lipińska*
Affiliation:
Board of Governors of the Federal Reserve System
*
Address correspondence to Anna Lipińska, Board of Governors of the Federal Reserve System, Division of Monetary Affairs, 20th Street and Constitution Avenue NW, Washington, DC 20551, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper uses a dynamic stochastic general equilibrium model of a two-sector small open economy to analyze how the Maastricht criteria modify a fully credible optimal monetary policy in the Economic and Monetary Union accession countries. We show that if the country is not constrained by the criteria, optimal policy should stabilize fluctuations in PPI inflation, in the aggregate output gap, and in the domestic and international terms of trade. The optimal policy constrained permanently by the Maastricht criteria is characterized by reduced variability of the nominal exchange rate, CPI inflation, and the nominal interest rate and by lower optimal targets for CPI inflation and nominal interest rate. This policy results in higher variability and nonzero means for both PPI inflation and output gap, thus leading to additional, but small, welfare costs compared with the unconstrained policy.

Keywords

Optimal Monetary PolicyMaastricht Convergence CriteriaEMU Accession Countries
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 7 , October 2015 , pp. 1427 - 1475
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adam, K. and Billi, R. (2006) Optimal monetary policy under commitment with a zero bound on nominal interest rates. Journal of Money, Credit and Banking 38 (7), 1877–1905.CrossRefGoogle Scholar
Altissimo, F., Benigno, P., and Palenzuela, D.R. (2011) Inflation differentials in a currency area: Facts, explanation and policy. Open Economies Review 22, 198–233.CrossRefGoogle Scholar
Aoki, K. (2001) Optimal monetary responses to relative price changes. Journal of Monetary Economics 48 (1), 55–80.CrossRefGoogle Scholar
Beirne, J. and Bijsterbosch, M. (2011) Exchange rate pass-through in Central and Eastern European EU member states. Journal of Policy Modelling 33 (2), 241–254.CrossRefGoogle Scholar
Benigno, G. and Benigno, P. (2006) Designing targeting rules for international monetary policy cooperation. Journal of Monetary Economics 53, 473–506.CrossRefGoogle Scholar
Benigno, G. and Thoenisen, C. (2003) Equilibrium exchange rates and supply side performance. Economic Journal 113, 103–24.CrossRefGoogle Scholar
Benigno, P. (2004) Optimal monetary policy in a currency area. Journal of International Economics 63 (2), 293–320.CrossRefGoogle Scholar
Benigno, P. (2009) Price stability with imperfect financial integration. Journal of Money, Credit and Banking 41 (s1), 121–49.CrossRefGoogle Scholar
Benigno, P. and Lopez-Salido, D. (2006) Inflation persistence and optimal monetary policy in the euro area. Journal of Money, Credit and Banking 38 (3), 587–614.CrossRefGoogle Scholar
Benigno, P. and Woodford, M. (2005) Inflation stabilisation and welfare: The case of a distorted steady state. Journal of the European Economic Association 3 (6), 1–52.CrossRefGoogle Scholar
Benigno, P. and Woodford, M. (2012) Linear–quadratic approximation of optimal policy problems. Journal of Economic Theory 147, 1–42.CrossRefGoogle Scholar
Benkovskis, K. and Rimgailaite, R. (2010) The Quality and Variety of Exports from New EU Member States: Evidence from Very Disaggregate Data. Latvijas Banka working paper 2/2010.Google Scholar
Bodenstein, M., Erceg, C., and Guerrieri, L. (2009) The Effects of Foreign Shocks When Interest Rates Are at Zero. International Finance Discussion Papers 983, Federal Reserve Board.CrossRefGoogle Scholar
Buiter, W. and Grafe, C. (2002) Anchor, float or abandon the ship: Exchange rate regimes for the accession countries. Banca Nazionale del Lavoro Quarterly Review 221, 1–32.Google Scholar
Calvo, G. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383–98.CrossRefGoogle Scholar
Campolmi, A. (2014) Which inflation to target? A small open economy model with sticky wages. Macroeconomic Dynamics 18 (1), 145–174.CrossRefGoogle Scholar
Canzoneri, M., Cumby, R., and Diba, B. (2005) How Do Monetary and Fiscal Policy Interact in the European Monetary Union? NBER working paper 11055.CrossRefGoogle Scholar
Chari, V.V., Kehoe, P.J., and McGrattan, E.R. (2002) Can sticky price models generate volatile and persistent real exchange rates? Review of Economic Studies 69, 533–563.CrossRefGoogle Scholar
Coibion, O., Gorodnichenko, Y., and Wieland, Y. (2012) The optimal inflation rate in New Keynesian models: Should central banks raise their inflation targets in light of the zero lower bound? Review of Economic Studies 79, 1371–1406.CrossRefGoogle Scholar
Coricelli, F. (2002) Exchange rate policy during transition to the European Monetary Union. Economics of Transition 10, 405–417.CrossRefGoogle Scholar
Coricelli, F., Bostjan, J., and Masten, I. (2003) Exchange Rate Pass-Through in Candidate Countries. CEPR discussion paper 3894.Google Scholar
Corsetti, G., Dedola, L., and Leduc, S. (2008) International risk sharing and the transmission of productivity shocks. Review of Economic Studies 75 (2), 443–73.CrossRefGoogle Scholar
Corsetti, G. and Pesenti, P. (2001) Welfare and macroeconomic interdependence. Quarterly Journal of Economics 116, 421–45.CrossRefGoogle Scholar
De Paoli, B. (2009) Monetary policy and welfare in a small open economy. Journal of International Economics 77, 11–22.CrossRefGoogle Scholar
Devereux, M. (2003) A macroeconomic analysis of EU accession under alternative monetary policies. Journal of Common Market Studies 41, 941–64.Google Scholar
Devereux, M.B., Lane, P., and Xu, J. (2006) Exchange rates and monetary policy in emerging market economies. Economic Journal 116, 478–506.CrossRefGoogle Scholar
Duarte, M. and Wolman, A. (2008) Fiscal policy and regional inflation in a currency area. Journal of International Economics 74 (2), 384–401.CrossRefGoogle Scholar
Ehrmann, M., Fratzscher, M., R.S. Gurkaynak, and Swanson, E. (2011) Convergence and anchoring of yield curves in the euro area. Review of Economics and Statistics 93, 350–364.CrossRefGoogle Scholar
European Central Bank (2012) Convergence Report. Frankfurt: European Central Bank.Google Scholar
Fabiani, S., Druant, M., Hernando, I., Kwapil, C., Landau, B., Loupias, C., Martins, F., Matha, T., Sabbatini, R., Stahl, H., and Stokman, A. (2006) What firms' surveys tell us about price-setting behaviour in the euro area. International Journal of Central Banking 2 (3), 3–49.Google Scholar
Fidrmuc, J. and Kirhonen, I. (2003) Similarity of supply and demand shocks between the euro area and the ceecs. Economic Systems 27, 313–334.CrossRefGoogle Scholar
Fidrmuc, J. and Kirhonen, I. (2006) Meta-analysis of the business cycle correlation between the euro area and the CEECS. Journal of Comparative Economics 34, 518–537.CrossRefGoogle Scholar
Frommel, M., Garabedian, G., and Schobert, F. (2009) Monetary Policy Rules in Central and Eastern European Countries: Does the Exchange Rate Matter? Working papers of Faculty of Economics and Business Administration, Ghent University, Belgium, 09/611.Google Scholar
Gali, J., Gertler, M., and Lopez-Salido, D. (2001) European inflation dynamics. European Economic Review 7, 1237–1270.Google Scholar
Gali, J. and Monacelli, T. (2005) Monetary policy and exchange rate volatility in a small open economy. Review of Economic Studies 72, 707–34.CrossRefGoogle Scholar
Hamilton, J. (1994) Time Series Analysis. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Jakab, Z.M. and Vilagi, B. (2008) An Estimated DSGE Model of the Hungarian Economy. MNB working paper 2008/9.Google Scholar
Jung, T., Teranishi, Y., and Watanabe, T. (2005) Optimal monetary policy at the zero interest rate bound. Journal of Money, Credit and Banking 37 (5).CrossRefGoogle Scholar
Justiniano, A. and Preston, B. (2010) Can structural small open-economy models account for the influence of foreign disturbances? Journal of International Economics 81 (1), 61–74.CrossRefGoogle Scholar
Kolasa, M. (2008) Structural Heterogeneity or Asymmetric Shocks? Poland and the Euro Area through the Lens of a Two-Country DSGE Model. National Bank of Poland working paper 49(49).CrossRefGoogle Scholar
Kollmann, R. (2001) The exchange rate in a dynamic-optimising business cycle model with nominal rigidities: A quantitative investigation. Journal of International Economics 55, 243–262.CrossRefGoogle Scholar
Kulish, M. and Rees, D. (2008) Monetary Transmission and the Yield Curve in a Small Open Economy. Research discussion paper of Reserve Bank of Australia 2008/3.Google Scholar
Laxton, D. and Pesenti, P. (2003) Monetary rules for small, open, emerging economies. Journal of Monetary Economics 50, 1109–1146.CrossRefGoogle Scholar
Lipińska, A. (2011) The Maastricht Criteria and Optimal Monetary and Fiscal Policy Mix for the EMU Accession Countries. Unpublished manuscript, Universitat Autonoma de Barcelona.Google Scholar
Liu, Z. and Pappa, E. (2008) Gains from international monetary coordination: Does it pay to be different? Journal of Economic Dynamics and Control 32 (7), 2085–2117.CrossRefGoogle Scholar
Lucas, R.E.J. (1987) Models of Business Cycles. Oxford, UK: Blackwell.Google Scholar
Martins, J., Scarpetta, S., and Pilat, D. (1996) Mark-Up Pricing, Market Structure and the Business Cycle. Organization for Economic Cooperation and Development, OECD Economic Studies 27.Google Scholar
Mihaljek, D. and Klau, M. (2004) The Balassa–Samuelson Effect in Central Europe: A Disaggregated Analysis. BIS working paper 143.CrossRefGoogle Scholar
Monacelli, T. (2004) Into the Mussa Puzzle: Monetary policy regimes and the real exchange rate in a small open economy. Journal of International Economics 62, 191–217.CrossRefGoogle Scholar
Nakov, A. (2008) Optimal and simple monetary policy rules with zero floor on the nominal interest rate. International Journal of Central Banking 4 (2), 73–127.Google Scholar
Natalucci, F. and Ravenna, F. (2008) Monetary policy choice in emerging market economies: The case of high productivity growth. Journal of Money, Credit and Banking 40 (2–3), 243–271.Google Scholar
National Bank ofHungary (2002) Adopting the Euro in Hungary: Expected Benefits, Costs and Timing. NBH occasional paper.Google Scholar
National Bank of Poland (2004) A report on the costs and benefits of Poland's adoption of the euro. Technical Report, National Bank of Poland.Google Scholar
Rabanal, P. and Tuesta, V. (2013) Nontradables goods and real exchange rate. Open Economies Review 24 (3), 495–535.CrossRefGoogle Scholar
Rabanal, P. and Tuesta, V. (2010) Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment. Journal of Economic Dynamics and Control 34, 780–797.CrossRefGoogle Scholar
Ravenna, F. (2012) Why join a currency union? A note on the impact of beliefs on the choice of monetary policy. Macroeconomic Dynamics 16 (2), 320–334.CrossRefGoogle Scholar
Rotemberg, J. and Woodford, M. (1997) An optimization-based framework for the evaluation of monetary policy. NBER Macroeconomics Annual 12, 297–346.CrossRefGoogle Scholar
Rotemberg, J. and Woodford, M. (1998) Interest Rate Rules in an Estimated Sticky Price Model. NBER working paper 6618.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2003) An estimated DSGE model for the euro area. Journal of the European Economic Association 1 (5), 1123–1175.CrossRefGoogle Scholar
Stockman, A. and Tesar, L. (1995) Tastes and technology in a two-country model of the business cycle: Explaining international comovements. American Economic Review 1, 168–85.Google Scholar
Sutherland, A. (2002) A Simple Second Order Solution Method for Dynamic General Equilibrium Models. CEPR discussion paper 3554.Google Scholar
Vasicek, O. and Musil, K. (2009) An estimated model of the small open Czech economy with a non-tradable sector. Bulletin of the Czech Econometric Society 16 (26), 1–25.Google Scholar
Woodford, M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar