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Currency Unions, the Phillips Curve, and Stabilization Policy: Some Suggestions for Europe


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  • Thomas I. Palley

    (Economics of Democratic and Open Societies, Washington, DC)


This paper examines the implications of a currency union for monetary policy. The formation of a currency union worsens the inflation-unemployment tradeoff, so that leaving the inflation target unchanged at its pre-currency union level generates increased unemployment. Geographically based fiscal automatic stabilizers can improve the inflation-unemployment trade-off, which has bearings on the Euro area’s Stability and Growth Pact. Financial intermediary balance sheet regulation based on asset-based reserve requirements (ABRR) can provide additional country-specific policy instruments. ABRR alleviate the targets and instruments problem afflicting the monetary authority in a currency union context. This is important for the European Central Bank, which is trying to manage divergent country growth rates with a single interest rate instrument.

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Bibliographic Info

Article provided by Edward Elgar in its journal Intervention. European Journal of Economics and Economic Policies (subtitle initially: Zeitschrift fuer Oekonomie / Journal of Economics).

Volume (Year): 3 (2006)
Issue (Month): 2 ()
Pages: 351-369

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Handle: RePEc:elg:ejeepi:v:3:y:2006:i:2:p:351-369

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Keywords: currency unions; Phillips curve; monetary policy; fiscal policy; asset based reserve requirements;

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Cited by:
  1. Engelbert Stockhammer & Stefan Ederer, 2008. "Demand effects of the falling wage share in Austria," Empirica, Springer, Springer, vol. 35(5), pages 481-502, December.


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