Optimal Monetary Policy and the Sources of Local-Currency Price Stability

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(1)EUI Working Papers RSCAS 2007/26. PIERRE WERNER CHAIR PROGRAMME ON MONETARY UNION. Optimal Monetary Policy and the Sources of Local-Currency Price Stability. Giancarlo Corsetti, Luca Dedola and Sylvain Leduc.

(2) EUROPEAN UNIVERSITY INSTITUTE, FLORENCE ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES PIERRE WERNER CHAIR PROGRAMME ON MONETARY UNION. Optimal Monetary Policy and the Sources of Local-Currency Price Stability GIANCARLO CORSETTI, LUCA DEDOLA AND SYLVAIN LEDUC. EUI Working Paper RSCAS 2007/26.

(3) This text may be downloaded only for personal research purposes. Additional reproduction for other purposes, whether in hard copies or electronically, requires the consent of the author(s), editor(s). Requests should be addressed directly to the author(s). If cited or quoted, reference should be made to the full name of the author(s), editor(s), the title, the working paper, or other series, the year and the publisher. The author(s)/editor(s) should inform the Robert Schuman Centre for Advanced Studies at the EUI if the paper will be published elsewhere and also take responsibility for any consequential obligation(s).. ISSN 1028-3625. © 2007 Giancarlo Corsetti, Luca Dedola and Sylvain Leduc Printed in Italy in November 2007 European University Institute Badia Fiesolana I – 50014 San Domenico di Fiesole (FI) Italy http://www.eui.eu/RSCAS/Publications/ http://cadmus.eui.eu.

(4) Robert Schuman Centre for Advanced Studies The Robert Schuman Centre for Advanced Studies (RSCAS), directed by Stefano Bartolini since September 2006, is home to a large post-doctoral programme. Created in 1992, it aims to develop inter-disciplinary and comparative research and to promote work on the major issues facing the process of integration and European society. The Centre hosts major research programmes and projects, and a range of working groups and ad hoc initiatives. The research agenda is organised around a set of core themes and is continuously evolving, reflecting the changing agenda of European integration and the expanding membership of the European Union. Details of this and the other research of the Centre can be found on: http://www.eui.eu/RSCAS/Research/ Research publications take the form of Working Papers, Policy Papers, Distinguished Lectures and books. Most of these are also available on the RSCAS website: http://www.eui.eu/RSCAS/Publications/ The EUI and the RSCAS are not responsible for the opinion expressed by the author(s). Pierre Werner Chair Programme on Monetary Union The Pierre Werner Chair Programme on Monetary Union, named in memory of Pierre Werner, one of the architects of economic and monetary union, is funded through the generosity of the Luxembourg Government. The principal focus of the programme is economic policy and the political economy of European monetary integration. The programme aims at identifying policy priorities consistent with the new European economic constitution, as well as the factors that can foster economic growth and prosperity in a stable macroeconomic environment at both regional and global levels. For further information: Pierre Werner Chair Programme on Monetary Union Robert Schuman Centre for Advanced Studies European University Institute Via delle Fontanelle, 19 I - 50014 San Domenico di Fiesole, Italy E-mail: pwcprog@eui.eu http://www.eui.eu/RSCAS/Research/Economy/.

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© 2007 Giancarlo Corsetti, Luca Dedola and Sylvain Leduc.

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© 2007 Giancarlo Corsetti, Luca Dedola and Sylvain Leduc. 11.

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