Abstract. The loss of the sovereign interest rate and exchange rate instruments is the main potential cost of joining a monetary union since it becomes more difficult to adjust swiftly to shocks. In the case of demand shocks that affect all countries more or less equally (symmetric shocks), the loss of monetary autonomy implied by EMU is in principle of less concern, because the area-wide policy would tend to deliver monetary conditions that are appropriate for each country. However, this may not always be the case if the transmission mechanism operates significantly differently in the euro area, because then a uniform policy response would not yield uniform effects. In the case of supply shocks – whether country specificor- area-wide – lasting changes in relative prices and production patterns are needed.

Keywords: asymmetric shocks; output-gap; monetary policy; Taylor rule; the fiscal-monetary policy mix.