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The Optimality of a Monetary Union Without a Fiscal Union

The paper explores the case for monetary and fiscal unification. Monetary policy suffers from an inflation bias because the monetary authorities are not able to commit. With international risk-sharing in a fiscal union, fiscal discipline suffers from moral hazard. An inflation target alleviates the inflation bias but weakens fiscal discipline. In a monetary union, however, this adverse effect on fiscal discipline is weaker. This advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilize country-specific shocks. While monetary unification may thus be optimal, international risk-sharing may be undesirable because it weakens fiscal discipline.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1975.

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Date of creation: Sep 1998
Date of revision:
Handle: RePEc:cpr:ceprdp:1975
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  1. Persson, Torsten & Tabellini, Guido, 1996. "Monetary Cohabitation in Europe," American Economic Review, American Economic Association, vol. 86(2), pages 111-16, May.
  2. Capie,Forrest & Fischer,Stanley & Goodhart,Charles & Schnadt,Norbert, 1995. "The Future of Central Banking," Cambridge Books, Cambridge University Press, number 9780521496346.
  3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  4. Anne Sibert, 1996. "Monetary Integration and Economic Convergence," Archive Working Papers 030, Birkbeck, Department of Economics, Mathematics & Statistics.
  5. Beetsma, R.M.W.J. & Bovenberg, A.L., 1997. "Designing fiscal and monetary institutions in a second best world," Other publications TiSEM 9cf95e79-e382-4268-8e4d-c, Tilburg University, School of Economics and Management.
  6. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
  7. repec:oup:qjecon:v:100:y:1985:i:4:p:1169-89 is not listed on IDEAS
  8. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  9. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779.
  10. Gordon, R.H. & Bovenberg, A.L., 1994. "Why is capital so immobile internationally? : Possible explanations and implications for capital income taxation," Discussion Paper 1994-63, Tilburg University, Center for Economic Research.
  11. Beetsma, Roel M W J & Jensen, Henrik, 1998. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 384-403, August.
  12. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  13. Kletzer, Kenneth M., 1997. "Macroeconomic stabilization with a common currency: Does European Monetary Unification create a need for fiscal insurance of federalism?," ZEI Working Papers B 04-1997, ZEI - Center for European Integration Studies, University of Bonn.
  14. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-30, October.
  15. Sorensen, Bent E. & Yosha, Oved, 1998. "International risk sharing and European monetary unification," Journal of International Economics, Elsevier, vol. 45(2), pages 211-238, August.
  16. Bent E. S�rensen & Oved Yosha, 1998. "International Risk Sharing and European Monetary Unification," Temi di discussione (Economic working papers) 327, Bank of Italy, Economic Research and International Relations Area.
  17. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  18. Bovenberg, A.L. & Gordon, R.H., 1996. "Why is capital so immobile internationally? Possible explanation and implications for capital income taxation," Other publications TiSEM 6a131c21-fd9a-4d83-8d9a-7, Tilburg University, School of Economics and Management.
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