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Monetary Union and Macroeconomic Stabilization

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  • Dominik Groll

Abstract

It is conventionally held that countries are worse off by forming a monetary union when it comes to macroeconomic stabilization. However, this conventional view relies on assuming that monetary policy is conducted optimally. Relaxing the assumption of optimal monetary policy not only uncovers that countries do benefit from forming a monetary union under fairly general conditions. More importantly, it also reveals that a monetary union entails the inherent benefit of stabilizing private-sector expectations about future inflation. As a result, inflation rates are more stable in a monetary union

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1881.

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Length: 63 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:kie:kieliw:1881

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Keywords: Monetary union; macroeconomic stabilization; welfare analysis; history dependence; inflation expectations;

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  1. Pappa, Evi, 2004. "Do the ECB and the fed really need to cooperate? Optimal monetary policy in a two-country world," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(4), pages 753-779, May.
  2. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0233, National Bureau of Economic Research, Inc.
  3. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
  4. Mirco Soffritti & Francesco Zanetti, 2008. "The advantage of tying one's hands: revisited," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 13(2), pages 135-149.
  5. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, The MIT Press, edition 3, volume 1, number 0262013770, December.
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