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Common Currencies vs. Monetary Independence

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  • Thomas F. Cooley
  • Vincenzo Quadrini

Abstract

We study the optimal monetary policy in a two-country open-economy model under two monetary arrangements: (a) multiple currencies controlled by independent policy makers; (b) common currencies with a centralized policy maker.Our findings suggest that: (i) monetary policy competition leads to higher long-term inflation and interest rates with large welfare losses; (ii) the inflation bias and the consequent losses are larger when countries are unable to commit to future policies; (iii) the welfare losses from higher long-term inflation dominates the welfare costs of losing the ability to react optimally to shocks. Copyright 2003, Wiley-Blackwell.

Suggested Citation

  • Thomas F. Cooley & Vincenzo Quadrini, 2003. "Common Currencies vs. Monetary Independence," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 785-806.
  • Handle: RePEc:oup:restud:v:70:y:2003:i:4:p:785-806
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00267
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