EMU: some unanswered questions

monetary policy would be a potential source of cyclical divergence and could impose
significant adjustment demands on other economic policies”. However, and in spite of its
relevance, this fact has not been explicitly analysed since recent years.

The objective of this paper is to analyse the implications of the existence of different
responses to common monetary shocks at a regional level in a well-established currency area
as a way to evaluate the potential asymmetric effects of the Single Monetary Policy on the
Euro Zone countries and regions. In particular, we analyse the different impact of monetary
policy on output and prices evolution in the Spanish regions. The structure of the paper is as
follows: First, the main mechanisms of monetary policy transmission are analysed from a
theoretical perspective; second, the available empirical evidence about different responses to
monetary shocks and its determinants is reviewed; and next, the main results about
asymmetries in output and prices response to monetary shocks in the Spanish regions are
shown; and, last, the paper finishes summarising the main implications of these results in
relation to EMU.

2. The mechanisms of monetary transmission

As it is well known, monetary policy can be a very useful tool to correct macroeconomic
desequilibria. However, sometimes the implementation of a particular monetary policy can
have unexpected or unwanted consequences related not also to the existence of lags between
the adoption of the measure and its effects but also to the magnitude of these effects. These
adverse consequences are usually related to the characteristics of the mechanisms through
which monetary policy influences real economy. These mechanisms are known as
“transmission mechanisms or channels”. In the literature, four different mechanisms have
been identified: The interest rate channel, the exchange rate channel, the asset prices channel
and the credit channel.

From a very simple point of view, interactions between financial variables and non-financial
activity can be reduced and simplified to interactions between interest rates and non-financial
activity. In this sense, the underlying presumption of this literature is that monetary authority
exercises power over economic behaviour of private-sector agents by influencing the financial
(opportunity) cost relevant to the spending decisions of these agents and the main implication
of this view is that variations in the interest rate operating through changes in the cost of

<<   1   2   3   4   5   6   >>

More intriguing information