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

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  • Paul Cavelaars
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    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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    File URL: http://www.dnb.nl/binaries/ms2000-12_tcm46-147300.pdf
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    Bibliographic Info

    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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    1. 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.
    2. Eichengreen, Barry & Ghironi, Fabio, 1997. "How Will Transatlantic Policy Interactions Change with the Advent of EMU?," CEPR Discussion Papers 1643, C.E.P.R. Discussion Papers.
    3. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
    4. Philippe Martin, 1997. "The Exchange Rate Policy of the Euro: a Matter of Size?," Working Papers 1997-06, CEPII research center.
    5. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
    6. 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.
    7. Agnès Bénassy-Quéré & Benoît Mojon & Jean Pisani-Ferry, 1997. "The Euro and Exchange Rate Stability," Working Papers 1997-12, CEPII research center.
    8. 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.
    9. Guy Debelle, 1996. "Central Bank Independence," IMF Working Papers 96/1, International Monetary Fund.
    10. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
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