Optimal Monetary Policy in a Currency Union: Implications of Country-specific Financial Frictions

2016 ◽  
Vol 49 (1) ◽  
pp. 1-36 ◽  
Author(s):  
Jochen Michaelis, ◽  
Jakob Palek
Keyword(s):  
Monetary Policy ◽  
Financial Frictions ◽  
Currency Union ◽  
Optimal Monetary Policy ◽  
Country Specific

scholarly journals Robust monetary policy in a currency union

2012 ◽  
Vol 59 (2) ◽  
pp. 185-199
Author(s):  
Olga Kuznetsova
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Model Uncertainty ◽  
Currency Union ◽  
Optimal Monetary Policy ◽  
Economic Shocks ◽  
Worst Case ◽  
Attenuation Effect ◽  
Optimal Reaction ◽  
Country Specific

A great number of recent researches have found importance of country specific shocks for optimal monetary policy construction in the context of a currency union. This however has been almost completely overlooked by the analysis of optimal monetary policy under model uncertainty. The main purpose of our work is to fill this gap. By using a model of a two-country currency union with sticky prices, we have derived robust monetary policy that works reasonably well even in the worst case of model perturbations. We find some anti-attenuation effect of uncertainty, and show that the central bank?s optimal reaction to economic shocks becomes more aggressive with an increase in the extent of misspecification.

scholarly journals Monetary Policy for a Bubbly World

2020 ◽  
Author(s):  
Vladimir Asriyan ◽  
Luca Fornaro ◽  
Alberto Martin ◽  
Jaume Ventura
Keyword(s):  
Monetary Policy ◽  
Private Sector ◽  
Central Bank ◽  
Financial Frictions ◽  
Optimal Monetary Policy ◽  
Future Value ◽  
Money Creation ◽  
The Creation

Abstract What is the role of monetary policy in a bubbly world? To address this question, we study an economy in which financial frictions limit the supply of assets. The ensuing scarcity generates a demand for “unbacked” assets, i.e., assets that are backed only by the expectation of their future value. We consider two types of unbacked assets: bubbles, which are created by the private sector, and money, which is created by the central bank. Bubbles and money share many features, but they also differ in two crucial respects. First, while the rents from the creation of bubbles accrue to entrepreneurs and foster investment, the rents from money creation accrue to the central bank. Second, while bubbles are driven by market psychology, and can rise and fall according to the whims of the market, money is under the control of the central bank. We characterize the optimal monetary policy and show that, through its ability to supply assets, monetary policy plays a key role in the bubbly world. The model sheds light on the recent expansion of central bank liabilities in response to the bursting of bubbles.

scholarly journals Optimal Monetary Policy in a Currency Union With Interest Rate Spreads

2013 ◽  
Vol 2013 (150) ◽  
Author(s):  
Saroj Bhattarai ◽  
◽  
Jae Won Lee ◽  
Woong Yong Park ◽  
◽  
...  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Currency Union ◽  
Optimal Monetary Policy ◽  
Interest Rate Spreads
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