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Monetary Stabilisation Policy in a Monetary Union: Some Simple Analytics

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Nolan, Charles

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Abstract

We do two things in this paper. First, we look at some simple models of monetary decision making in a monetary union and ask how much more variable a country's output and inflation is likely to be if it joins the union. We answer this analytically and then go on to "calibrate" the simple model. The model has few structural equations, but it is useful in allowing us to examine how the variability of output and inflation are likely to change as key parameters change. Our conclusions on this front are likely to be sensitive to model specification. However, we also identify a second best issue concerning the optimal make-up of the monetary union which is likely to be more robust: namely that only when all members of the union have the same structural parameter values (and shocks are perfectly correlated) will it be optimal for a new member to have these same structural parameter values. Copyright 2002 by Scottish Economic Society.

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Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 49 (2002)
Issue (Month): 2 (May)
Pages: 196-215
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Handle: RePEc:bla:scotjp:v:49:y:2002:i:2:p:196-215

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References listed on IDEAS
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  1. Chadha, J.S. & Hudson, S.L., 1998. "The Optimum Currency Area Case for EMU: A Structural VAR Approach," Discussion Paper Series In Economics And Econometrics 9815, Economics Division, School of Social Sciences, University of Southampton.
  2. Persson, Torsten & Tabellini, Guido, 1996. "Monetary Cohabitation in Europe," American Economic Review, American Economic Association, vol. 86(2), pages 111-16, May. [Downloadable!] (restricted)
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  3. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
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  4. Canzoneri, Matthew B & Minford, Patrick, 1986. "When International Policy Coordination Matters: An Empirical Analysis," CEPR Discussion Papers 119, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc. [Downloadable!]
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  6. Hughes Hallett, A J, 1986. "Autonomy and the Choice of Policy in Asymmetrically Dependent Economies: An Investigation of the Gains from International Policy Co-ordination," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 516-44, November. [Downloadable!] (restricted)
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  8. Giavazzi, Francesco & Pagano, Marco, 1986. "The Advantages of Tying One's Hands: EMS Discipline and Central Bank Credibility," CEPR Discussion Papers 135, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Tamim Bayoumi and Barry Eichengreen., 1993. "One Money or Many? On Analyzing the Prospects for Monetary Unification in Various Parts of the World," Center for International and Development Economics Research (CIDER) Working Papers C93-030, University of California at Berkeley.
  10. Hughes Hallett, A J, 1993. "Exchange Rates and Asymmetric Policy Regimes: When Does Exchange Rate Targeting Pay?," Oxford Economic Papers, Oxford University Press, vol. 45(2), pages 191-206, April. [Downloadable!] (restricted)
  11. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June. [Downloadable!] (restricted)
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  13. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier. [Downloadable!] (restricted)
  14. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
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  15. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  16. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December. [Downloadable!] (restricted)
  17. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February. [Downloadable!] (restricted)
  18. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March. [Downloadable!] (restricted)
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  19. Martin Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Hallet, A. J. Hughes, 1994. "On the imperfect substitutability of policy regimes : Exchange rate targetting vs policy coordination," Economics Letters, Elsevier, vol. 44(1-2), pages 159-164. [Downloadable!] (restricted)
  21. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-1), pages 1-82. [Downloadable!]
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  1. Moïse Sidiropoulos & Eleftherios Spyromitros, 2006. "Fiscal Policy in a Monetary Union Under Alternative Labour-Market Structures," Working Papers of BETA 2006-25, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  2. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Government Leadership and Central Bank Design," Working Papers 0208, Department of Economics, Vanderbilt University, revised Dec 2004. [Downloadable!]
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  3. Buiter, Willem H, 2000. "Monetary Misconceptions: New and Old Paradigmata and Other Sad Tales," CEPR Discussion Papers 2365, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Andrew Hughes Hallett & Diana N. Weymark, 2001. "The Cost of Heterogeneity in a Monetary Union," Working Papers 0128, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  5. Buiter, Willem H, 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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