Joining a Monetary Union: Stabilisation Costs Versus Stabilisation Bias

Currency union participation may create a welfare tradeoff relating to monetary factors. Stabilisation costs arise from asymmetric shocks across the union. Countries pursuing discretionary national monetary policies benefit from a committed common central bank, which eliminates Svensson’s(1997) stabilisation bias. Currency union membership is favoured by greater price stability focus and commitment of the common central bank, nominal flexibility, and business cycle synchronisation. Monetary union stabilisation performance also improves with lower variability and persistence of cost-push shocks – the latter feature being detectable only for persistence. The degree of monetary policy robustness to parameter uncertainty has somewhat less clear-cut implications.