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

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  • Andrew Hughes Hallett
  • Laura Piscitelli

Abstract

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.

Suggested Citation

  • Andrew Hughes Hallett & Laura Piscitelli, 2002. "Does One Size Fit All? A currency union with asymmetric transmissions and a stability pact," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 71-96.
  • Handle: RePEc:taf:irapec:v:16:y:2002:i:1:p:71-96
    DOI: 10.1080/02692170110109344
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    References listed on IDEAS

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    Cited by:

    1. Monteforte, Libero, 2007. "Aggregation bias in macro models: Does it matter for the euro area?," Economic Modelling, Elsevier, vol. 24(2), pages 236-261, March.
    2. Jean-Paul Fitoussi & Francesco Saraceno, 2002. "A Theory of Social Custom of Which Soft Growth May Be One Consequence. Tales of the European Stability Pact," Sciences Po publications n°2002-07, Sciences Po.
    3. Matteo Ciccarelli & Alessandro Rebucci, 2001. "The Transmission Mechanism of European Monetary Policy: Is There Heterogeneity? Is It Changing Over Time?," Working Papers 0115, Banco de España;Working Papers Homepage.
    4. repec:spo:wpecon:info:hdl:2441/1422 is not listed on IDEAS
    5. Francesco Carlucci & Alessandro Girardi, 2004. "National Specifities and Monetary-Policy Trasmission in Europe," Working Papers 73, University of Rome La Sapienza, Department of Public Economics.
    6. Bruck, Tilman & Zwiener, Rudolf, 2006. "Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 357-369, May.
    7. Mehdi Pedram, 2011. "Optimal monetary policy in the monetary union: effects on business cycles," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 35(1), pages 90-117, March.
    8. Hughes Hallett, Andrew & Richter, Christian, 2004. "Estimating an equilibrium exchange rate for the dollar and other key currencies," Economic Modelling, Elsevier, vol. 21(6), pages 1117-1144, December.

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