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Does One Size Fit All? A currency union with asymmetric transmissions and a stability pact

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  • Andrew Hughes Hallett
  • Laura Piscitelli

Abstract

The theory of optimal currency areas stresses that a single currency zone should have symmetry across shocks and structures. What happens if the monetary transmission mechanisms differ so that a common monetary policy has different effects in different places? Using a fully specified econometric model, we find that such asymmetries are likely to destabilise the business cycle and put countries out of phase with each other in a way that cannot be corrected by deficit-constrained national fiscal policies. Market discipline, however, could achieve this. Hence, the question is whether the markets would create sufficient discipline on their own.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 16 (2002)
Issue (Month): 1 ()
Pages: 71-96

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Handle: RePEc:taf:irapec:v:16:y:2002:i:1:p:71-96

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1750, C.E.P.R. Discussion Papers.
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  4. Stephen G. Cecchetti, 1999. "Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism," NBER Working Papers 7151, National Bureau of Economic Research, Inc.
  5. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 15-64, 04.
  6. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc.
  7. David C. Wheelock, 1999. "National monetary policy by regional design: the evolving role of the Federal Reserve banks in Federal Reserve System policy," Working Papers, Federal Reserve Bank of St. Louis 1998-010, Federal Reserve Bank of St. Louis.
  8. Mads Kieler & Tuomas Saarenheimo, 1998. "Differences in monetary policy transmission? A case not closed," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 132, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  9. Spencer Dale & Andrew Haldane, 1993. "Interest rates and the channels of monetary transmission: some sectoral estimates," Bank of England working papers 18, Bank of England.
  10. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
  11. Ramana Ramaswamy & Torsten Sløk, 1998. "The Real Effects of Monetary Policy in the European Union: What Are the Differences?," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 374-396, June.
  12. Maclennan, Duncan & Muellbauer, John & Stephens, Mark, 1998. "Asymmetries in Housing and Financial Market Institutions and EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 54-80, Autumn.
  13. Gerald A. Carlino & Robert DeFina, 1998. "Monetary policy and the U.S. and regions: some implications for European Monetary Union," Working Papers 98-17, Federal Reserve Bank of Philadelphia.
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Cited by:
  1. Francesco Carlucci & Alessandro Girardi, 2004. "National Specifities and Monetary-Policy Trasmission in Europe," Working Papers, University of Rome La Sapienza, Department of Public Economics 73, University of Rome La Sapienza, Department of Public Economics.
  2. Libero Monteforte, 2004. "Aggregation bias in macro models: does it matter foir the euro area?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 534, Bank of Italy, Economic Research and International Relations Area.
  3. repec:spo:wpecon:info:hdl:2441/1422 is not listed on IDEAS
  4. Tilman Brück & Rudolf Zwiener, 2004. "Fiscal Policy Rules for Stabilisation and Growth: A Simulation Analysis of Deficit and Expenditure Targets in a Monetary Union," Discussion Papers of DIW Berlin 427, DIW Berlin, German Institute for Economic Research.
  5. Hughes Hallett, Andrew & Richter, Christian, 2004. "Estimating an equilibrium exchange rate for the dollar and other key currencies," Economic Modelling, Elsevier, vol. 21(6), pages 1117-1144, December.
  6. Jean-Paul Fitoussi & Francesco Saraceno, 2002. "A Theory of Social Custom of Which Soft Growth May Be One Consequence. Tales of the European Stability Pact," Sciences Po publications n°2002-07, Sciences Po.
  7. Matteo Ciccarelli & Alessandro Rebucci, 2002. "The Transmission Mechanism of European Monetary Policy," IMF Working Papers 02/54, International Monetary Fund.

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