Real Exchange Rates and Monetary Policymaking in the EMU

This paper extends the framework provided by Aksoy, De Grauwe, Dewachter (2000). We first provide an econometric analysis of the stabilising properties of the monetary policy in the EMU countries within an open economy framework and obtain optimal feedback rules for monetary policymaking. In a second step we construct a hypothetical Euroland where we introduce alternative voting schemes at the level of the European Central Bank Governing Council. Under various voting possibilities we simulate the likely country specific stabilising properties of output, inflation and interest rates of the ECB monetary policies with the use of the results obtained from econometric analysis and provide some welfare analysis. Our results corroborates the findings of Aksoy, De Grauwe, Dewachter (2000) in that the large countries are likely to dominate the monetary policymaking at the ECB. Furthermore, we do not find any significant impact or the real exchange rates on the monetary policymaking of the ECB.