Research Discussion Papers, Bank of Finland
No 9/2004:
Asymmetries in the Euro area economy
David G. Mayes ()
and Matti Virén ()
Abstract: Using quarterly data for the period since 1987 this paper
explores, in the context of a small model of the EU economy, the degree to
which monetary policy has been asymmetric. It shows in particular that
monetary policy has been much more responsive to threats that inflation
would lie outside the price stability target than to equal sized shocks
within the target zone. Similarly monetary policy has responded to threats
of large positive and negative output gaps but has remained largely
unresponsive to smaller divergences. It thus appears that the ECB and its
predecessors have been avoiding 'fine-tuning' but have been aggressive in
responding to substantial threats to macroeconomic stability. The action
seems to have been stronger with respect to inflationary pressure than to
deflation but this may offset any bias in fiscal policy. The asymmetric
response of policy in part reflects considerable non-linearities and
asymmetries in the behaviour of the euro area economies. High unemployment
has relatively limited effect in pulling inflation down while low
unemployment can be much more effective in driving it up. Economic
downturns are both more rapid and sustained in driving unemployment up than
recoveries are in bringing it down. There is considerable variety in these
relationships and IS curves across countries, sectors and regions. Monetary
policy reacts in the light of this.
Keywords: monetary policy; asymmetry; (follow links to similar papers)
JEL-Codes: E52; E61; (follow links to similar papers)
59 pages, March 1, 2004
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