Working Paper: CEPR ID: DP1804
Authors: Rudiger Dornbusch; Carlo A. Favero; Francesco Giavazzi
Abstract: This paper discusses a number of issues that the newly constituted board of the European Central Bank (ECB) will face early on. We show how conducting a European monetary policy is very different from living under the protective umbrella of the Bundesbank. We discuss voting on the ECB board, and argue that the ability to communicate to the public will be a critical factor for the success of the new institution. We also ask how a single monetary policy ? a common change in the interest rate controlled by the ECB ? is transmitted to the economy of the member countries. We show that the monetary process differs significantly inside EMU: initially, at least, the cost of a disinflation episode could thus fall very unequally on a few member countries because they have a combination of financial structure that spreads a monetary contraction widely, and a wage-price structure that is relatively inflexible. Moreover, this process is sure to evolve, in part, as a result of the financial industry restructuring that is already underway and will be accentuated by the common money. Furthermore, as the ?Lucas principle? suggests, the wage-price process itself will adapt to the changing focus of European monetary policy.
Keywords: European Monetary Union; European Central Bank; Credit Channel; Monetary Conditions Index
JEL Codes: E5; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's monetary policy (E52) | economic outcomes in member countries (O57) |
| ECB's monetary policy (E52) | cost of disinflation (E31) |
| cost of disinflation (E31) | disproportionately affect countries with rigid wage-price structures (F66) |
| ECB's policies (E52) | financial restructuring (G33) |
| communication of ECB's policy (E52) | effectiveness of ECB's policies (E52) |
| regional and political backgrounds (R50) | preferences of board members (D71) |
| preferences of board members (D71) | monetary policy decisions (E52) |