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What is the Optimal Institutional Arrangement for a Monetary Union?

Author

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  • Leonardo Gambacorta

    (Bank of Italy, Economic Research Department)

Abstract

The aim of this paper is to design the optimal institutional arrangement for a monetary union. Using a two-country rational expectations model, the study analyses how the conservatism of the area-wide central bank and the penalty system for fiscal deviation (Stability and Growth Pact) should be designed with respect to different economic shocks. The optimal institutional arrangement is also dependent on who is the "leader" of the policy game. When national governments move first, the independent area-wide central bank can exercise greater discipline over national fiscal policies, making the Stability Pact unnecessary.

Suggested Citation

  • Leonardo Gambacorta, 1999. "What is the Optimal Institutional Arrangement for a Monetary Union?," Temi di discussione (Economic working papers) 356, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_356_99
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/1999/1999-0356/tema_356_99.pdf
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    References listed on IDEAS

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    1. Paolo Giovane & Lorenzo Bini-Smashi, 1996. "Convergence of inflation: A necessary prerequisite for EMU?," Open Economies Review, Springer, vol. 7(2), pages 117-126, April.
    2. Alberto Franco Pozzolo, 2004. "Research and Development, Regional Spillovers and the Location of Economic Activities," Manchester School, University of Manchester, vol. 72(4), pages 463-482, July.
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    Cited by:

    1. Stefano Siviero & Daniele Terlizzese & Ignazio Visco, 1999. "Are model-based inflation forecasts used in monetary policymaking? A case study," Temi di discussione (Economic working papers) 357, Bank of Italy, Economic Research and International Relations Area.

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      More about this item

      Keywords

      monetary union; Stability Pact; monetary policy; fiscal policy;
      All these keywords.

      JEL classification:

      • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
      • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
      • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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