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Common Currencies versus Monetary Independence

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  • Cooley, Thomas F
  • Quadrini, Vincenzo

Abstract

We study the optimal monetary policy in a two-country open-economy model under two monetary arrangements: (a) multiple currencies controlled by independent policy-makers; (b) common currencies controlled by a centralized policy-maker. Our findings suggest that: (i) Monetary policy competition leads to higher long-term inflation and interest rates with large welfare losses; (ii) The inflation bias and the consequent losses are larger when countries are unable to commit to future policies; (iii) in both cases, the welfare losses from higher in ation dominates the welfare costs of losing the ability to react optimally to business cycle shocks. Therefore, the coordination of policies implicit in the adoption of a common currency or dollarization has positive welfare consequences.

Suggested Citation

  • Cooley, Thomas F & Quadrini, Vincenzo, 2002. "Common Currencies versus Monetary Independence," CEPR Discussion Papers 3436, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3436
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    References listed on IDEAS

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    Cited by:

    1. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank.
    2. Fuchs, William & Lippi, Francesco, 2003. "Monetary Union with Voluntary Participation," CEPR Discussion Papers 4122, C.E.P.R. Discussion Papers.
    3. Alho, Kari, 2002. "Stabilization Inside and Outside EMU," Discussion Papers 821, The Research Institute of the Finnish Economy.

    More about this item

    Keywords

    common currency; international coordination; optimal monetary policy;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F00 - International Economics - - General - - - General

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