The delegation of monetary policy to a supranational central bank creates a conflict of interest between residents of different countries. For example, the country in recession may favor more inflation to boost output, while the country in boom prefers exactly the opposite.This conflict gives rise to an adverse selection problem. Provided each government has private information about the current state of the economy, it may try to exploit it in order to shift the common monetary policy to his own preferred way. The paper shows that problems of this kind can generate both an inflation and primary deficit bias (in line with the worries of Workers' Europe addressed by the "stability pact") as well as an excess monetary discipline and recession bias (in line with the worries addressed by the Bankers' Europe concern).When information problems are particularly severe, monetary and fiscal policy becomes relatively insensitive to business cycle conditions, and too little "smoothing" is done over the business cycle.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number
127.
Length: Date of creation: Date of revision: Handle: RePEc:igi:igierp:127
Contact details of provider: Postal: via Rontgen, 1 - 20136 Milano (Italy) Phone: 0039-02-58363301 Fax: 0039-02-58363302 Web page: http://www.igier.unibocconi.it/
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)