Double Discretion, International Spillovers and the Welfare Implications of Monetary Unification

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Double Discretion, International Spillovers and the Welfare Implications of Monetary Unification

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Paul Cavelaars

Abstract

This paper develops a monetary-fiscal game which stresses the importance of international spillovers and introduces a double (monetary and fiscal) credibility problem. The first part of the paper shows that the welfare cost of structural distortions is increased by the inability of fisical policymakers to commit, whereas the welfare cost of stochastic shocks is increased by international spillovers. The second part of the paper studies the welfare consequences of the monetary union. It is shown that the welfare impact of EMU for Europe is ambiguous, but that EMU is welfare-improving for the US.

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Paper provided by Netherlands Central Bank, Monetary and Economic Policy Department in its series MEB Series (discontinued) with number 2000-12.

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Date of creation: Dec 2000
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Handle: RePEc:dnb:mebser:2000-12

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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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Other versions:
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Other versions:
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Other versions:
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Barry Eichengreen & Fabio Ghironi, 1999. "Macroeconomic Tradeoffs in the United States and Europe: Fiscal Distortions and the International Monetary Regime," Boston College Working Papers in Economics 467, Boston College Department of Economics. [Downloadable!]
Beetsma,Roel M.W.J., 1996. "The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility," Research Memoranda 005, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
Other versions:
- Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility," DELTA Working Papers 95-24, DELTA (Ecole normale supérieure).
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