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Designing Stabilization Policy in a Monetary Union

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  • Russell W. Cooper
  • Hubert Kempf

Abstract

While the European Monetary Union (EMU) is now a reality, debate among economists nonetheless continues about the design and desirability of monetary unions. Since an essential element of a monetary union is the delegation of monetary power to a single centralized entity, one of the key issues in this debate is whether a monetary union will limit the effectiveness of stabilization policy. If so, monetary union will not necessarily be welfare improving. In this paper, we study a two-country world economy and consider various designs of monetary union. We argue that the success of monetary union depends on : (i) the commitment ability of the single central bank, (ii) the policy flexibility of the national fiscal authorities and the central monetary authority and (iii) the cross country correlation of shocks. If, for example, the central bank moves before the fiscal authorities, then a monetary union will increase welfare as long as fiscal policy is sufficiently responsive to shocks. However, if the fiscal authorities have a restricted set of tools and/or the monetary authority lacks the ability to commit to its policy, then monetary union may not be desirable.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7607.

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Date of creation: Mar 2000
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Handle: RePEc:nbr:nberwo:7607

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  7. Poterba, James M, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 395-400, May.
  8. Willem H. Buiter, 1999. "The EMU and the NAMU: What is the Case for North American Monetary Union?," Canadian Public Policy, University of Toronto Press, University of Toronto Press, vol. 25(3), pages 285-305, September.
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  10. Uhlig, H.F.H.V.S. & Beetsma, R.M.W.J., 1997. "An Analysis of the Stability Pact," Discussion Paper, Tilburg University, Center for Economic Research 1997-59, Tilburg University, Center for Economic Research.
  11. Arthur J. Rolnick & Bruce D. Smith & Warren E. Weber, 1993. "In order to form a more perfect monetary union," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  12. Martin Feldstein, 1998. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," NBER Working Papers 6150, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ahmed AlKholifey & Ali Alreshan, 2010. "GCC monetary union," IFC Bulletins chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Proceedings of the SARB/IFC seminar on "Economic and financial convergence en route to regional economic integration: experience, prospects and statis, volume 32, pages 17-51 Bank for International Settlements.
  2. Drazen Derado, 2009. "Financial Integration and Financial Crisis: Croatia Approaching The EMU," Financial Theory and Practice, Institute of Public Finance, Institute of Public Finance, vol. 33(3), pages 299-328.
  3. Russell Cooper & Hubert Kempf, 2003. "Commitment and the Adoption of a Common Currency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 119-142, February.
  4. Russell Cooper & Hubert Kempf, 2004. "Overturning Mundell: Fiscal Policy in a Monetary Union," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 371-396.
  5. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, Elsevier, vol. 45(4-6), pages 977-987, May.
  6. Luisa Lambertini & Paul Levine & Joseph Pearlman, 2007. "Fiscal Policy in a Monetary Union: Can Fiscal Cooperation be Counterproductive?," School of Economics Discussion Papers, School of Economics, University of Surrey 1707, School of Economics, University of Surrey.
  7. Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers, Copenhagen Business School, Department of Finance 2005-1, Copenhagen Business School, Department of Finance.
  8. Giovanni Di Bartolomeo & Debora Di Gioacchino, 2004. "Fiscal- Monetary Policy and Debt Management: a Two Stage Dynamic Analysis," Working Papers, University of Rome La Sapienza, Department of Public Economics 74, University of Rome La Sapienza, Department of Public Economics.
  9. Otmar Issing, 2002. "Anmerkungen zur Koordinierung der makroökonomischen Politik in der WWU," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, DIW Berlin, German Institute for Economic Research, vol. 71(3), pages 312-324.
  10. Giovanni Di Bartolomeo & Debora Di Gioacchino, 2005. "Fiscal-Monetary Policy Coordination And Debt Management: A Two Stage Dynamic Analysis," Macroeconomics, EconWPA 0504024, EconWPA.
  11. Ca' Zorzi, Michele & De Santis, Roberto A. & Zampolli, Fabrizio, 2005. "Welfare implications of joining a common currency," Working Paper Series, European Central Bank 0445, European Central Bank.
  12. Paolo Biraschi, . "Searching for the optimal EMU fiscal rule:an ex-post analysis of the SGP reform proposals," Working Papers, Department of the Treasury, Ministry of the Economy and of Finance wp2008-7, Department of the Treasury, Ministry of the Economy and of Finance.
  13. repec:cbk:journl:v:2:y:2013:i:2:p:5-27 is not listed on IDEAS
  14. Roberto Tamborini, 2002. "One "monetary giant" with many "fiscal dwarfs": The efficiency of macroeconomic stabilization policies in the European Monetary Union," Department of Economics Working Papers, Department of Economics, University of Trento, Italia 0204, Department of Economics, University of Trento, Italia.
  15. Giovanni Di Bartolomeo & Debora Di Gioacchino, 2008. "Fiscal-monetary policy coordination and debt management: a two-stage analysis," Empirica, Springer, Springer, vol. 35(4), pages 433-448, September.
  16. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(1), pages 245-262, February.
  17. Russell Cooper & Hubert Kempf & Dan Peled, 2004. "Is it is or is it Ain't my Obligation? Regional Debt in Monetary Unions," NBER Working Papers 10239, National Bureau of Economic Research, Inc.
  18. Damir Šehović, 2013. "General Aspects of Monetary and Fiscal Policy Coordination," Journal of Central Banking Theory and Practice, Central bank of Montenegro, Central bank of Montenegro, vol. 2(3), pages 5-27.

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