No. 2/2003
INTEREST RATE DECISIONS IN AN ASYMMETRIC
MONETARY UNION

Egil Matsen
Øistein Røisland

Abstract:
Decision rules matter for monetary policy in a currency union if
the interest rate affects member states differently. We examine the
consequences for inflation, output and interest rate fluctuations and the
welfare loss of four alternative types of decision procedures. We show
that the alternative decision rules have very dissimilar properties and
that dfferent rules favour different types of countries. In addition to
asymmetric transmission mechanisms, we consider asymmetric shocks.
We show that it is the combination of a country’s interest rate elasticity
and the covariance between the shocks to the country and the shocks
to the union that determines which decision rule the country would
favour.