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Economic Cooperation within Europe: Lessons from the Monetary Arrangements in the 1990s

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  • Hughes Hallett, Andrew
  • Ma, Yue

Abstract

The early 1990s marked a distinction between the EMS as a vehicle for creating monetary stability and the EMS as a vehicle for moving towards monetary union. We model that distinction by contrasting policies generated by preference transfers from the lead country (to create the EMS discipline of `tying ones hands') against policies generated by extending the domain of policy-making to Europe-wide targets. We find both solutions to be incentive incompatible compared to simple non-cooperative policy-making, unless the aim becomes the social welfare of Europe as a whole. Various modifications are considered, but incentive compatibility requires some monetary relaxation in order to redistribute the gains. That combines German monetary discipline with differentiated fiscal-monetary mixes for the different economic structures elsewhere in the system. These results are used to explain why wider bands paradoxically provide a more credible route to monetary union.

Suggested Citation

  • Hughes Hallett, Andrew & Ma, Yue, 1995. "Economic Cooperation within Europe: Lessons from the Monetary Arrangements in the 1990s," CEPR Discussion Papers 1190, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1190
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    Cited by:

    1. Carmen Díaz-Roldan, 2004. "International monetary policy coordination under asymmetric shocks," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 10(1), pages 72-82, February.

    More about this item

    Keywords

    European Monetary Union; Policy Cooperation;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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