Using a simple multi-country econometric model covering the three main countries of the euro area, the paper focuses on the role that can be played by information at the national level in defining the monetary policy of the Union. We find that the performance of a central bank that chooses the nominal interest rate to minimize a standard quadratic loss function of area-wide inflation and output gap improves significantly if the reaction function includes national variables — as opposed to the case in which the interest rate reacts to area-wide variables only. Our results suggest that asymmetries within the euro area are relevant to the central bank; overall, we interpret them as making a case for exploiting the available national information in the conduct of the single monetary policy.
Published in 2008 in: International Journal of Central Banking, v. 4, 3, pp. 1-28
