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The Cost of Heterogeneity in a Monetary Union

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  • Hughes Hallett, Andrew
  • Weymark, Diana

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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  1. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
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Citations

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Cited by:
  1. Kwanho Shin & Yunjong Wang, 2003. "Monetary Integration Ahead of Trade Integration in East Asia?," ISER Discussion Paper 0572, Institute of Social and Economic Research, Osaka University.
  2. Robert-Paul Berben & Jan Marc Berk & Ekniti Nitihanprapas & Kanit Sangsuphan & Pisit Puapan & Piyaporn Sodsriwiboon, 2003. "Requirements for successful currency regimes: The Dutch and Thai experiences," DNB Occasional Studies, Netherlands Central Bank, Research Department 101, Netherlands Central Bank, Research Department.
  3. Alexandra Ferreira Lopes, 2007. "The Costs of EMU for Transition Countries," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 2, Money Macro and Finance Research Group.
  4. Andrew Hughes Hallett & Diana N. Weymark, 2003. "Independent Monetary Policies and Social Equality," Vanderbilt University Department of Economics Working Papers 0307, Vanderbilt University Department of Economics.
  5. Diana N. Weymark, 2005. "Inflation, Government Transfers, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0502, Vanderbilt University Department of Economics.
  6. Schalck, Christophe, 2012. "Investigating heterogeneity in European fiscal behaviours," Research in Economics, Elsevier, Elsevier, vol. 66(4), pages 383-390.
  7. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Government Leadership and Central Bank Design," Vanderbilt University Department of Economics Working Papers 0208, Vanderbilt University Department of Economics, revised Dec 2004.
  8. Berk, J.M & Swank, J., 2002. "Regional price adjustment in a monetary union: the case of EMU," Serie Research Memoranda, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics 0016, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  9. Hughes Hallett, Andrew & Weymark, Diana, 2002. "Independence before Conservatism: Transparency, Politics and Central Bank Design," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3336, C.E.P.R. Discussion Papers.
  10. Sondermann, David, 2012. "Productivity in the euro area: any evidence of convergence?," Working Paper Series, European Central Bank 1431, European Central Bank.
  11. Belhadj, Aam, 2009. "Heterogeneity of the Maghreb: the results of optimized monetary rules," MPRA Paper 40374, University Library of Munich, Germany.
  12. Diana N. Weymark, 2001. "Inflation, Income Redistribution, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0102, Vanderbilt University Department of Economics.
  13. Jan Marc Berk & Job Swank, 2002. "Regional Price Adjustment in a Monetary Union," Tinbergen Institute Discussion Papers 02-077/2, Tinbergen Institute.
  14. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Policy Games and the Optimal Design of Central Banks," Vanderbilt University Department of Economics Working Papers 0220, Vanderbilt University Department of Economics.
  15. Andre, Nyembwe, 2003. "Monetary Policy, Credibility and Asymmetries : Small African Countries and the EMU Advent," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 06 Aug 2002.
  16. repec:dgr:uvatin:2002077 is not listed on IDEAS
  17. Rasmus Fatum, 2003. "One Monetary Policy and Eighteen Central Bankers: The European Monetary Policy as a Game of Strategic Delegation," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 03-19, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

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