This paper employs a multi-country delegation model of a single monetary policy and argues that a decision making mechanism based on the median voter theorem is too restrictive for capturing important aspects of monetary policy in the European Monetary Union, particularly because intensity of preferences cannot play a role when only the median voter matters. Replacing the median voter mechanism by a less restrictive “weighted mean mechanism”, it is shown that strategic delegation leads to a single monetary policy set in accordance with the preferences of the most inflation-averse member state. This finding provides theoretical support for “The Twin Sister Hypothesis” and the perception of the European Central Bank implementing the policy of the Bundesbank rather than the policy of an average union-wide central bank.
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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number
03-19.
Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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