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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.

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  • 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. Alexandra Lopes, 2006. "The Costs of EMU for Transition Countries," Computing in Economics and Finance 2006 149, Society for Computational Economics.
    2. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, vol. 62(2), pages 359-377, March.
    3. Ferreira-Lopes, Alexandra, 2010. "In or out? The welfare costs of EMU membership," Economic Modelling, Elsevier, vol. 27(2), pages 585-594, March.
    4. Carre, Martine & Collard, Fabrice, 2003. "Monetary union: A welfare based approach," European Economic Review, Elsevier, vol. 47(3), pages 521-552, June.
    5. Margarida Duarte & Alexander L. Wolman, 2002. "Regional inflation in a currency union: fiscal policy vs. fundamentals," International Finance Discussion Papers 746, Board of Governors of the Federal Reserve System (U.S.).
    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. 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.
    8. 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.

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