Optimum Monetary Policy in European Monetary Union

Abstract

The euro has been introduced to a region that contains many discrepancies and differences. While there are many countries with different business cycles, exerting a single monetary policy which favors all the countries is impossible. I will show that in a simple open macro model by using “weighted mean mechanism”, monetary authorities can exert a common monetary policy to synchronize business cycles and to diminish loss functions in the member states. As we can see by using optimal monetary policy, the business cycles become much more stable and even in 2009 we do not see any recession for Germany and France. Although In this model between 2006 till 2012 the MU (Monetary Union) interest rate should be higher than the United States one, the agent’s countries would be in boom rather recession. If MU interest rates in 2012 and 2013 were less than the actual ones, recession in two countries would change to boom for them.