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The Optimality of a Monetary Union without a Fiscal Union

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Author Info
Beetsma, Roel M W J
Bovenberg, A Lans

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Abstract

The paper explores the case for monetary and fiscal unification. Monetary policy suffers from an inflation bias because the monetary authorities are not able to commit. With international risk-sharing, fiscal discipline suffers from moral hazard. An inflation target alleviates the inflation bias but weakens fiscal discipline. In a monetary union, however, this adverse effect on fiscal discipline is weaker. This advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilise country-specific shocks. While monetary unification may thus be optimal, international risk-sharing may be undesirable because it weakens fiscal discipline.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 33 (2001)
Issue (Month): 2 (May)
Pages: 179-204
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Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:2:p:179-204

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Beetsma, Roel & Debrun, Xavier & Klaassen, Frank, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Hubert Kempf & Leopold von Thadden, 2008. "On policy interactions among nations. When do cooperation and commitment matter?," Working Paper Series 880, European Central Bank. [Downloadable!]
    Other versions:
  3. Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers 2005-1, Copenhagen Business School, Department of Finance. [Downloadable!]
  4. Uhlig, Harald, 2002. "One Money, but Many Fiscal Policies in Europe: What Are the Consequences?," CEPR Discussion Papers 3296, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Matteo Governatori & Sylvester Eijffinger, 2004. "Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Peter CLAEYS, 2004. "Monetary and budgetary policy interaction: an SVAR analysis of stabilisation policies in monetary union," Economics Working Papers ECO2004/22, European University Institute. [Downloadable!]
  7. Thierry Warin, 2005. "The Hidden Structural Features of the Fiscal Rule: A European Saga," International Advances in Economic Research, Springer, vol. 11(1), pages 29-38, March. [Downloadable!] (restricted)
  8. Østrup, Finn, 2006. "The Choice of Monetary Regime," Working Papers 2005-2, Copenhagen Business School, Department of Finance. [Downloadable!]
  9. repec:bep:glecon:5:2007:1:6 is not listed on IDEAS
  10. Alex Cukierman & Alberto Dalmazzo, 2006. "Fiscal-monetary policy interactions in the presence of unionized labor markets," International Tax and Public Finance, Springer, vol. 13(4), pages 411-435, August. [Downloadable!] (restricted)
    Other versions:
  11. Xavier Debrun & Francesca Castellani, 2001. "Central Bank Independence and the Design of Fiscal Institutions," IMF Working Papers 01/205, International Monetary Fund. [Downloadable!]
  12. Samir Jahjah, 2001. "Financial Stability and Fiscal Crises in a Monetary Union," IMF Working Papers 01/201, International Monetary Fund. [Downloadable!]
  13. Roel Beetsma & Koen Vermeylen, 2005. "The Effect of Monetary Unification on Public Debt and its Real Return," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  14. Ridhwan, M.M. & Nijkamp, P. & Rietveld, P. & Groot, H.L.F. de, 2008. "Regional development and monetary policy : a review of the role of monetary unions, capital mobility and locational effects," Serie Research Memoranda 0007, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
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