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

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  • Gros Daniel

    (Centre for European Policy Studies, Brussels, Belgium)

  • Hefeker Carsten

    (HWWA Institute of International Economics, Hamburg, Germany)

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.

Suggested Citation

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