The advent of European Economic and Monetary Union (EMU) scheduled for the beginning of 1999 has sparked off a debate about the best way of conducting monetary policy in the euro area. One dimension of this discussion concerns the preferred framework for conducting monetary policy-that is, about whether the European Central Bank (ECB) ought to target inflation, monetary aggregates, or the exchange rate. A second is about differences in the effects of changes in monetary policy on activity in different EU countries, related to differences in the transmission mechanism.
Opinions have tended to be divided on the question of the preferred monetary policy framework for the euro area, although recently, there appears to be a consensus emerging in favor of informal inflation targeting, accompanied by monitoring of monetary aggregates and other indicators. In any event, policy discussions have in general tended to focus less on questions relating to the real effects of monetary policy in the EU than on the issue of the appropriate framework for conducting monetary policy in the euro area. This may be partly due to the fact that many of the issues pertaining to identification of the monetary transmission mechanism tend to be econometric rather than economic. Nevertheless, a proper understanding of possible differences in the effects of changes in monetary policy on activity among the EU countries is crucial for an appreciation of the difficulties that may arise from the implementation of a unified monetary policy throughout the euro area. And this issue is the main focus of the paper.
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