Working Paper: CEPR ID: DP5101
Authors: Fabio Canova; Carlo A. Favero
Abstract: We examine monetary policy in the euro area from both theoretical and empirical perspectives. We discuss what theory tells us the strategy of Central banks should be and contrasts it with the one employed by the ECB. We review accomplishments (and failures) of monetary policy in the euro area and suggest changes that would increase the correlation between words and actions; streamline the understanding that markets have of the policy process; and anchor expectation formation more strongly. We examine the transmission of monetary policy shocks in the euro area and in some potential member countries and try to infer the likely effects occurring when Turkey joins the EU first and the euro area later. Much of the analysis here warns against having too high expectations of the economic gains that membership to the EU and euro club will produce.
Keywords: communication; EU newcomers; pillars; transmission
JEL Codes: C11; E12; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's policy framework (E52) | low inflation rates (E31) |
| ECB's communication strategy (E52) | market expectations (D84) |
| monetary policy shocks (E39) | economic impact of ECB's decisions (E58) |
| improvements in ECB's communication strategy (E52) | coherence between stated objectives and actual policy actions (E61) |
| coherence between stated objectives and actual policy actions (E61) | stability of market expectations (D84) |