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Relinquishing Monetary Policy Independence

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  • Tommaso Monacelli

    (Boston College)

Abstract

I study the macroeconomic costs (both in terms of stabilization and welfare) of the relinquishment of monetary policy independence associated with the membership of a currency area. The analysis is framed within a general equilibrium model of the world economy, composed by a large closed Union and a small (either independent or integrated) open economy. In terms of business cycle stabilization, I find that an economy relinquishing its monetary independence may face a potential trade-off between higher instability in real activity and lower instability in inflation. The tightness of this trade-off is found to be inversely related to the degree of cross-country symmetry of the shocks. In terms of welfare, maintaining the monetary stabilization tool proves to be always welfare improving. Finally, a higher degree of openness does not necessarily make a country a better candidate for participating in a currency area.

Suggested Citation

  • Tommaso Monacelli, 2000. "Relinquishing Monetary Policy Independence," Boston College Working Papers in Economics 483, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:483
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    References listed on IDEAS

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    Cited by:

    1. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, vol. 62(2), pages 359-377, March.
    2. Ferreira-Lopes, Alexandra, 2010. "In or out? The welfare costs of EMU membership," Economic Modelling, Elsevier, vol. 27(2), pages 585-594, March.
    3. Alexandra Lopes, 2006. "The Costs of EMU for Transition Countries," Computing in Economics and Finance 2006 149, Society for Computational Economics.
    4. Duarte, Margarida & Wolman, Alexander L., 2002. "Regional inflation in a currency union: fiscal policy vs. fundamentals," Working Paper Series 180, European Central Bank.
    5. Alexandra Ferreira-Lopes, 2014. "The Welfare Cost of the EMU for Transition Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2014(4), pages 446-473.
    6. Duarte, Margarida & Wolman, Alexander L., 2008. "Fiscal policy and regional inflation in a currency union," Journal of International Economics, Elsevier, vol. 74(2), pages 384-401, March.
    7. Devereux, Michael B, 2001. "International Risk-Sharing and the Exchange Rate: Re-evaluating the Case for Flexible Exchange Rates," CEPR Discussion Papers 2900, C.E.P.R. Discussion Papers.
    8. Carre, Martine & Collard, Fabrice, 2003. "Monetary union: A welfare based approach," European Economic Review, Elsevier, vol. 47(3), pages 521-552, June.

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