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The policy mix in a monetary union under alternative policy institutions and asymmetries

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Author Info
Laurent GAGNOL
Moise SIDIROPOULOS

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Abstract

In this paper we study the monetary and fiscal policy making in a monetary union when authorities face asymmetries in the countries constructing this monetary union. We analyze this problem in an asymmetric environment using a two-country theoretical model and by introducing two alternative types of national asymmetries : asymmetric shocks and the asymmetric transmission mechanism. The central issue of the paper is the design of the appropriate monetary and fiscal policy institutions. In this respect, we investigate which of the two alternative types of monetary policymakers (country representatives or governors) facing to two alternative types of fiscal policy (decentralized or centralized) contributes to better resolve the problem of the trade-off between credibility and flexibility. Our results show that delegate the monetary policy to a council of union-wide governors with decentralized fiscal policies is the appropriate institutional design that would reduce the iinflation bias and stabilize better the regional idiosyncratic shocks in a monetary union in the cases of perfectly asymmetric and perfectly symmetric shocks. In addition, in the case of asymmetric transmission, the monetary union would be better off with a council of monetary policy governors and centralized fiscal policies.

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Paper provided by Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg in its series Working Papers of BETA with number 2001-23.

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Date of creation: 2001
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Handle: RePEc:ulp:sbbeta:2001-23

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Related research
Keywords: EMU; Policy-Mix; Asymmetric shocks; Asymmetric transmission;

Find related papers by JEL classification:
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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  2. 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. [Downloadable!] (restricted)
  3. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Paul De Grauwe, 2000. "Monetary Policies in the Presence of Asymmetries," Journal of Common Market Studies, Blackwell Publishing, vol. 38(4), pages 593-612, November. [Downloadable!] (restricted)
  8. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Designing Fiscal and Monetary Institutions in a Second-Best World," Discussion Paper 47, Tilburg University, Center for Economic Research. [Downloadable!]
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  9. Mélitz, Jacques & Zumer, Frédéric, 1999. "Interregional and International Risk Sharing and Lessons for EMU," CEPR Discussion Papers 2154, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Süppel, Ralph & von Hagen, Jürgen, 1994. "Central Bank Constitutions for Monetary Unions," CEPR Discussion Papers 919, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. von Hagen, Jurgen & Suppel, Ralph, 1994. "Central bank constitutions for federal monetary unions," European Economic Review, Elsevier, vol. 38(3-4), pages 774-782, April. [Downloadable!] (restricted)
  12. von Hagen,Juergen & Fratianni,Michele, . "Monetary and fiscal policy in a European Monetary Union Some public choice consideration," Discussion Paper Serie B 156, University of Bonn, Germany.
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  14. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 15-64, 04. [Downloadable!] (restricted)
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