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The Costs/Benefits of a Common Monetary Policy in France and Germany and Possible Lessons for Monetary Union

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  • Mélitz Jacques
  • Axel A. Weber
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    Abstract

    In order to study the costs/benefits of a monetary union between Germany and France, we attempt to go beyond a mere focus on asymmetries and examine what each country would have lost or gained had there been a common monetary policy. We try to identify the macro effects of such a change within a structural VAR model, which is first estimated by employing mixed long-run and short-run identification schemes and subsequently simulated under the restrictions of a common monetary policy. Our analysis centres on the effect of identical monetary policy on movements in output inflation and the current account. We also study the effects on interest rate differentials in order to draw possible inferences about monetary integration. Based on the usual interpretations of national preferences in both countries, the results imply that, if anything, Germany would lose from any French participation in the setting of domestic monetary policy. By contrast, however, France would clearly gain from corresponding German participation in French decision-making.

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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 369.

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    Length: pages
    Date of creation: Apr 1996
    Date of revision:
    Handle: RePEc:bon:bonsfb:369

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

    Related research

    Keywords: Optimum currency areas; structural vector autoregression; shocks; costs/benefits; monetary union;

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    Cited by:
    1. Eduard Hochreiter & Anton Korinek & Pierre L. Siklos, 2003. "The potential consequences of alternative exchange rate regimes: A study of three candidate regions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(4), pages 327-349.
    2. Hélène Erkel-Rousse, 1997. "Degré de flexibilité des marchés du travail, ajustement à des chocs asymétriques et union monétaire européenne," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 128(2), pages 79-100.
    3. Frenkel, Michael & Nickel, Christiane, 2005. "New European Union members on their way to adopting the Euro: An analysis of macroeconomic disturbances," Global Finance Journal, Elsevier, vol. 15(3), pages 303-320, February.
    4. Michael Frenkel & Christiane Nickel, 2002. "How Symmetric Are the Shocks and the Shock Adjustment Dynamics Between the Euro Area and Central and Eastern European Countries (CEEC)+L2572?," IMF Working Papers 02/222, International Monetary Fund.

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