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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. Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2002.

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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
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