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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
  • Weber, Axel A

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 macroeconomic 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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1374.

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Date of creation: Apr 1996
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Handle: RePEc:cpr:ceprdp:1374

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Related research

Keywords: Costs/Benefits; France; Germany; Monetary Union; Optimum Currency Areas; Shocks;

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Cited by:
  1. Julius Horvath, 2004. "Optimum currency area theory: A selective review," Macroeconomics 0401014, EconWPA.
  2. Eduard H. Hochreiter & Pierre L. Siklos, 2004. "From Floating to Monetary Union: The Economic Distance between Exchange Rate Regimes," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  3. Massimo Giuliodori, . "The Empirical Relevance of a basic sticky-price intertemporal model," Working Papers 2001_17, Business School - Economics, University of Glasgow.
  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.
  5. 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., vol. 8(4), pages 327-349.
  6. Dominick Salvatore, 1998. "International Monetary and Financial Arrangements: Present and Future," Open Economies Review, Springer, vol. 9(1), pages 375-416, January.
  7. Bruneau, Catherine & De Bandt, Olivier, 2003. "Monetary and fiscal policy in the transition to EMU: what do SVAR models tell us?," Economic Modelling, Elsevier, vol. 20(5), pages 959-985, September.
  8. 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, vol. 128(2), pages 79-100.
  9. Bruneau, C. & De Bandt, O., 1999. "Fiscal Policy in the Transition to Monetary Union: a Structural VAR Model," Working papers 60, Banque de France.
  10. 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.

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