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On the Institutional Design of the European Monetary Union: Conservatism, Stability Pact and Economic Shocks

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  • Leonardo Gambacorta

Abstract

type="main" xml:lang="en"> The aim of this paper is to design the optimal institutional arrangement for a monetary union. Using a two-country rational expectations model, the study analyses how the conservatism of the area-wide central bank and the penalty system for fiscal deviation (Stability and Growth Pact) should be designed with respect to different economic shocks. The optimal institutional arrangement is also dependent on who is the ‘leader’ of the policy game. When national governments move first, the independent area-wide central bank can exercise greater discipline over national fiscal policies, making the Stability Pact unnecessary. (J.E.L.: E58, E63, F42).

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  • Leonardo Gambacorta, 2001. "On the Institutional Design of the European Monetary Union: Conservatism, Stability Pact and Economic Shocks," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(1), pages 109-143, February.
    • Handle: RePEc:bla:ecnote:v:30:y:2001:i:1:p:109-143
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