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How Should Large and Small Countries Be Represented in a Currency Union?

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  • Helge Berger
  • Till Mueller

Abstract

The likely extension of the euro area has triggered a debate on the organization of the ECB, in particular on the apparent mismatch between relative economic size and voting rights in the Council. We present a simple model of optimal representation in a federal central bank addressing this question. Optimal voting weights reflect two opposing forces: the wish to insulate common monetary policy from changing preferences at the national level, and the attempt to avoid an overly active or passive reaction to idiosyncratic national economic shocks. A perfect match between economic size and voting rights is rarely optimal, and neither is the “one country, one vote principle”. Empirically, there are indications that the pattern of over- and under-representation of member countries in the ECB Council might be extreme by the standards of the US Fed and German Bundesbank and not always optimal.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1344.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1344

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Keywords: Central Bank; Federal Central Bank; Currency Union; optimal representation; voting; ECB;

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Citations

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Cited by:
  1. Helge Berger, 2006. "Unfinished business? The ECB reform ahead of euro area enlargement," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 7(4), pages 35-41, December.
  2. Badinger, Harald & Nitsch, Volker, 2014. "National representation in supranational institutions: The case of the European Central Bank," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 19-33.
  3. Jan-Egbert Sturm & Timo Wollmershäuser, 2008. "The Stress of Having a Single Monetary Policy in Europe," CESifo Working Paper Series 2251, CESifo Group Munich.
  4. Helge Berger & Till Mueller, 2007. "How should large and small countries be represented in a currency union?," Public Choice, Springer, Springer, vol. 132(3), pages 471-484, September.
  5. Hefeker, Carsten, 2004. "Uncertainty, Wage Setting and Decision Making in a Monetary Union," HWWA Discussion Papers, Hamburg Institute of International Economics (HWWA) 272, Hamburg Institute of International Economics (HWWA).
  6. Ansgar Belke & Barbara Schnurbein, 2012. "European monetary policy and the ECB rotation model," Public Choice, Springer, Springer, vol. 151(1), pages 289-323, April.
  7. Helge Berger, 2006. "Optimal Central Bank Design: Benchmarks for the ECB," CESifo Working Paper Series 1697, CESifo Group Munich.
  8. Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, Elsevier, vol. 22(2), pages 307-321, June.

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