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What is the Optimal Institutional Arrangement for a Monetary Union?

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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.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td99/td356_99/td356/tema_356_99.pdf
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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 356.

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Date of creation: Jun 1999
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Handle: RePEc:bdi:wptemi:td_356_99

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Web page: http://www.bancaditalia.it
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Keywords: monetary union; Stability Pact; monetary policy; fiscal policy;

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  1. Pozzolo, Alberto Franco, 2003. "Research and Development, Regional Spillovers and the Location of Economic Activities," Economics & Statistics Discussion Papers esdp03008, University of Molise, Dept. EGSeI.
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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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