Real Exchange Rates and Monetary Policy Effectiveness in EMU.

Abstract

This paper extends the framework provided by De Grauwe, Dewachter and Aksoy (1998). Monetary policy effectiveness of the European Central Bank (ECB) in the open economy Euroland is addressed. The optimal feedback rules for the member states with the use of the backward looking variables are derived. The role of the real exchange rate is discussed. For alternative scenarios at the ECB Governing Council we simulate the monetary policy effectiveness and provide some welfare analysis.