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EnglishIn 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: when national 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 one-policy-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 size.
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| Titolo: | "Asymmetric information and monetary policy in common currency areas |
| Data di pubblicazione: | 2005 |
| Autori: | |
| Autori: | Bottazzi, Laura; Manasse, Paolo |
| Rivista: | JOURNAL OF MONEY, CREDIT, AND BANKING |
| 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: when national 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 one-policy-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 size. |
| Codice identificativo Scopus: | 2-s2.0-24144491365 |
| Codice identificativo ISI: | WOS:000230897400001 |
| Appare nelle tipologie: | 01 - Article in academic journal / Articolo su rivista Scientifica |
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