The process of European monetary integration has prompted interest in the study of differences in financial systems and their consequences for monetary transmission mechanisms. This paper analyses the case of a monetary union composed of countries with heterogeneous “credit channels”. In order better to insulate the economies from the asymmetric effects produced by differences in national financial systems, a money supply process based on the interest rate on bonds and its spread with respect to the bank lending rate is proposed. Using a two-country rational expectations model, this study highlights the properties of the optimal monetary instrument with respect to a wide range of stochastic disturbances.
Published in 2003 in: Economic Modelling, v. 20, 1, pp. 25-46
