by Paolo Angelinia, Paolo Del Giovanea, Stefano Sivieroa and Daniele Terlizzeseb
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.
Full article (PDF, 28 pages 412 kb)
a Economic Outlook and Monetary Policy Department, Bank of Italy
b Einaudi Institute for Economics and Finance, and Bank of Italy