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The optimality of a monetary union without a fiscal union

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  • Beetsma, R.M.W.J.
  • Bovenberg, A.L.

    (Tilburg University, Center for Economic Research)

Abstract

The paper explores the case for monetary and fiscal unification. Monetary policy suffers from an inflation bias because the monetary authorities are not able to commit. With international risk-sharing in a fiscal union, fiscal discipline suffers from moral hazard. An inflation target alleviates the inflation bias but weakens fiscal discipline. In a monetary union, however, this adverse effect on fiscal discipline is weaker. This advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilize country-specific shocks. While monetary unification may thus be optimal, international risk-sharing may be undesirable because it weakens fiscal discipline.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1998-81.

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Date of creation: 1998
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Handle: RePEc:dgr:kubcen:199881

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Related research

Keywords: EMS; fiscal policy; moral hazard;

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  1. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  3. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1997. "Designing fiscal and monetary institutions in a second-best world," European Journal of Political Economy, Elsevier, vol. 13(1), pages 53-79, February.
  4. Sorensen, B-E & Yosha, O, 1996. "International Risk Sharing and European Monetary Unification," Papers 40-96, Tel Aviv.
  5. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  6. Persson, Torsten & Tabellini, Guido, 1996. "Monetary Cohabitation in Europe," CEPR Discussion Papers 1380, C.E.P.R. Discussion Papers.
  7. Gordon, R.H. & Bovenberg, A.L., 1994. "Why Is Capital So Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation," Working Papers 358, Research Seminar in International Economics, University of Michigan.
  8. Taylor, John B., 1983. "`Rules, discretion and reputation in a model of monetary policy' by Robert J. Barro and David B. Gordon," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 123-125.
  9. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
  10. Stanley Fischer, 1995. "Modern Approaches to Central Banking," NBER Working Papers 5064, National Bureau of Economic Research, Inc.
  11. Beetsma, Roel & Jensen, Henrik, 1997. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," CEPR Discussion Papers 1562, C.E.P.R. Discussion Papers.
  12. Anne Sibert, 1996. "Monetary Integration and Economic Convergence," Archive Working Papers 030, Birkbeck, Department of Economics, Mathematics & Statistics.
  13. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779.
  14. 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.
  15. Guy Debelle, 1996. "Central Bank Independence," IMF Working Papers 96/1, International Monetary Fund.
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