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Does One Size Fit All? A currency union with asymmetric transmissions and a stability pact

  • Andrew Hughes Hallett
  • Laura Piscitelli

The theory of optimal currency areas stresses that a single currency zone should have symmetry across shocks and structures. What happens if the monetary transmission mechanisms differ so that a common monetary policy has different effects in different places? Using a fully specified econometric model, we find that such asymmetries are likely to destabilise the business cycle and put countries out of phase with each other in a way that cannot be corrected by deficit-constrained national fiscal policies. Market discipline, however, could achieve this. Hence, the question is whether the markets would create sufficient discipline on their own.

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Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 16 (2002)
Issue (Month): 1 ()
Pages: 71-96

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Handle: RePEc:taf:irapec:v:16:y:2002:i:1:p:71-96
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