Optimal stabilisation policy in a monetary union: implications of the Mankiw-Weinzierl model
by Georgios Karras
International Journal of Monetary Economics and Finance (IJMEF), Vol. 5, No. 2, 2012

Abstract: This paper uses the Mankiw and Weinzierl (2011) general equilibrium model of optimal stabilisation policy to ask how macroeconomic outcomes are affected by membership in a monetary union. The model agrees with much of the previous literature that the effects of various shocks may be amplified or dampened depending on how the common central bank responds, or fails to respond, to them. This in turn depends on how well (or poorly) correlated the domestic shocks are with their union-wide counterparts. For example, a negative spending shock will be the most recessionary when the shock is confined to the domestic economy, much less (if at all) recessionary when the shock is union wide, and actually expansionary if the shock is restricted to the rest of the union. Fiscal and productivity shocks are characterised by similar properties.

Online publication date: Tue, 28-Aug-2012

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