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- Title
OPTIMAL MONETARY POLICY FOR THE EMU ACCESSION COUNTRIES. A NEW KEYNESIAN APPROACH.
- Authors
Lipińska, Anna
- 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.
- Subjects
MONETARY policy; ECONOMIC &; Monetary Union; KEYNESIAN economics; WHOLESALE price indexes; CONSUMER price indexes
- Publication
Macroeconomic Dynamics, 2015, Vol 19, Issue 7, p1427
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100513000898