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One Size Must Fit All: National Divergences in a Monetary Union

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  • Daniel Gros
  • Carsten Hefeker

Abstract

Should a common central bank in a heterogeneous monetary union base its decisions on EU‐wide averages of economic variables or on national welfare losses? A central bank that minimizes the sum of national welfare losses reacts less to common shocks. Under certain parameter constellations this leads to higher average union‐wide expected welfare and it might thus be preferable that decision‐making is dominated by national representatives. Countries with a transmission mechanism far from the average benefit from an orientation on national welfare losses. For countries with a transmission mechanism close to the average, welfare can be lower in this case.

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  • Daniel Gros & Carsten Hefeker, 2002. "One Size Must Fit All: National Divergences in a Monetary Union," German Economic Review, Verein für Socialpolitik, vol. 3(3), pages 247-262, August.
    • Handle: RePEc:bla:germec:v:3:y:2002:i:3:p:247-262
    DOI: 10.1111/1468-0475.00059
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