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An empirical assessment of Optimal Monetary Policy in the euro area.

Chen, X. and Kirsanova, T. and Leith, C. (2017) 'An empirical assessment of Optimal Monetary Policy in the euro area.', European economic review., 100 . pp. 95-115.

Abstract

We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy-maker preferences and shock volatilities. This reveals that there have been several changes in Euro-area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turmoil in the ERM in 1992. The ECB does not appear to have been any more conservative as aggregate Euro-area policy was under Bundesbank leadership. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result, although both ‘good luck’ and ‘good policy’ played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. Adopting a flexible price level target would lead to outcomes close to commitment.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1016/j.euroecorev.2017.07.012
Publisher statement:© 2017 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Date accepted:13 July 2017
Date deposited:13 July 2017
Date of first online publication:14 August 2017
Date first made open access:14 August 2019

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