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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: anna.lipinska@frb.gov.
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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 

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