This paper discusses the strategic choices involved in the transformation of the current EMS into a European Monetary Union. Alternative strategy proposals are evaluated under the criteria of credibility, flexibility, effective institution-building and mitigation of end games. The Delors strategy mistakes exchange rate fixity for credibility, resulting in an overly rigid and unstable strategy. The Hard Ecu provides flexibility, but is unlikely to achieve EMU. We propose a softened EMS - the Two-Tier EMS - as an alternative that meets the four criteria in a more satisfactory way. The second part develops a principal-agent model of the central bank, which embodies an explanation of political business cycles and the credibility problem. We use this model to show that the current draft of the statutes of the European Central Bank does not solve the dilemma of discretion and credibility in a satisfactory way.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
618.
Find related papers by JEL classification: E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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Jürgen von Hagen, 2005.
"Political Economy of Fiscal Institutions,"
Discussion Papers
149, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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