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The Cost of Heterogeneity in a Monetary Union

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Author Info
Hughes Hallett, Andrew
Weymark, Diana

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Abstract

In this Paper, we explore whether heterogeneity among union members could threaten the stability of the EMU. The types of heterogeneity we consider are (1) asymmetries in the transmission of monetary and fiscal policies, and (2) differences in national preferences for price stability, output growth, and income redistribution. Our results show that the costs of membership are cumulative and can be significant for countries whose structure and/or preferences deviate from those underlying the common monetary policy. In part, these costs arise because monetary policy imposed by an independent central bank automatically constrains the use of fiscal policy by national governments.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3223.

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Date of creation: Feb 2002
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Handle: RePEc:cpr:ceprdp:3223

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Keywords: central bank independence currency union emu preference asymmetries transmission asymmetries

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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    Other versions:
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  4. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
  5. Calmfors, Lars, 1998. "Macroeconomic Policy, Wage Setting, and Employment--What Difference Does the EMU Make?," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 125-51, Autumn.
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  7. Stephen G. Cecchetti, 1999. "Legal structure, financial structure, and the monetary policy transmission mechanism," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-28. [Downloadable!]
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  8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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  10. Kieler, M. & Saarenheimo, T., 1998. "Differences in Monetary Policy Transmission? A Case Not Closed," European Economy - Economic Papers 132, Commission of the EC, Directorate-General for Economic and Financial Affairs (DG ECFIN).
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  12. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Economics Department. [Downloadable!]
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  14. De Grauwe, Paul, 1995. "Alternative strategies towards monetary union," European Economic Review, Elsevier, vol. 39(3-4), pages 483-491, April. [Downloadable!] (restricted)
  15. Calmfors, Lars, 1998. "Macroeconomic Policy, Wage Setting and Employment - What Difference Does the EMU Make?," Seminar Papers 657, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  18. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May. [Downloadable!] (restricted)
  19. Calmfors, Lars, 2001. "Unemployment, Labor Market Reform, and Monetary Union," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 265-89, April. [Downloadable!] (restricted)
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  21. Calmfors, L., 1998. "Macroeconomic Policy, Wage Setting and Employment -What Differences Does the EMU Make?," Papers 657, Stockholm - International Economic Studies.
  22. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1984-1), pages 1-76. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan Marc Berk & Job Swank, 2002. "Regional Price Adjustment in a Monetary Union," Tinbergen Institute Discussion Papers 02-077/2, Tinbergen Institute. [Downloadable!]
  2. Alexandra Ferreira Lopes, 2007. "The Costs of EMU for Transition Countries," Money Macro and Finance (MMF) Research Group Conference 2006 2, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  3. Berk, J.M & Swank, J., 2002. "Regional price adjustment in a monetary union: the case of EMU," Serie Research Memoranda 0016, Free University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
    Other versions:
  4. Diana N. Weymark, 2005. "Inflation, Government Transfers, and Optimal Central Bank Independence," Working Papers 0502, Department of Economics, Vanderbilt University. [Downloadable!]
  5. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Policy Games and the Optimal Design of Central Banks," Working Papers 0220, Department of Economics, Vanderbilt University. [Downloadable!]
  6. Andrew Hughes Hallett & Diana N. Weymark, 2003. "Independent Monetary Policies and Social Equality," Working Papers 0307, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  7. Diana N. Weymark, 2000. "Inflation, Income Redistribution, and Optimal Central Bank Independence," Working Papers 0102, Department of Economics, Vanderbilt University, revised Mar 2002. [Downloadable!]
  8. Hughes Hallett, Andrew & Weymark, Diana, 2002. "Government Leadership and Central Bank Design," CEPR Discussion Papers 3395, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. André, Nyembwe, . "Monetary Policy, Credibility and Asymmetries : Small African Countries and the EMU Advent," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 2003011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 06 Aug 2002. [Downloadable!]
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