Monetary Policy in a Monetary Union: What Role for Regional Information?

by Paolo Angelini^a, Paolo Del Giovane^a, Stefano Siviero^a and Daniele Terlizzese^b

Abstract

Can the central bank of a monetary union, whose objectives are exclusively defined in terms of union-wide variables, improve its performance by reacting to regional variables rather than to union-wide variables only? Our answer is not clear-cut. We find the improvement to be large when we use a backward-looking model of the economy and negligible when we use a hybrid model. The main determinant of this finding seems to be the different degree of inertia (or its opposite, the forward-lookingness) characterizing the two models, rather than other model features.

JEL Codes: E52.

 
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^aEconomic Outlook and Monetary Policy Department, Bank of Italy
^bEinaudi Institute for Economics and Finance, and Bank of Italy