IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Monetary stabilisation in a currency union of small open economies

Listed author(s):
  • Sánchez, Marcelo
Registered author(s):

    This paper studies stabilisation policies in a multi-country currency union of small open economies. It abstracts from key factors favouring currency union formation, such as reduced transaction costs and enhanced credibility, which are exogenous to the factors studied here. Demand-side shocks hamper monetary union stabilisation unless members face identical output-inflation tradeoffs and their business cycles are perfectly synchronised. Under supply shocks, welfare implications from joining a currency union are less clear cut. In particular, when these shocks are common across participating countries a tradeoff arises whereby the latter benefit if they are relatively open but are at a disadvantage in case they are of small size. Monetary-fiscal interaction leads to a free rider problem, with area-wide supply shocks eliciting higher interest rate variability. Compared with the case of real wage rigidity, increased real wage flexibility mitigates the free rider problem. Higher trade union decentralisation overall favours a currency union. The present multi-country currency union setup should not be seen as an attempt at settling the sharp differences that exist in the literature. Our model could be modified in order to derive results that are valid in more realistic environments. These include the analysis of public debt considerations in the case of fiscal policies, and both institutional and (further) macroeconomic aspects in the area of wage determination. JEL Classification: E52, E58, F33, F42, E63

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp927.pdf
    Download Restriction: no

    Paper provided by European Central Bank in its series Working Paper Series with number 0927.

    as
    in new window

    Length:
    Date of creation: Aug 2008
    Handle: RePEc:ecb:ecbwps:20080927
    Contact details of provider: Postal:
    60640 Frankfurt am Main, Germany

    Phone: +49 69 1344 0
    Fax: +49 69 1344 6000
    Web page: http://www.ecb.europa.eu/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window

    1. William Fuchs & Francesco Lippi, 2005. "Monetary Union with Voluntary Participation," Discussion Papers 04-013, Stanford Institute for Economic Policy Research.
    2. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
    3. Maurice Obstfeld and Kenneth Rogoff., 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research (CIDER) Working Papers C01-120, University of California at Berkeley.
    4. Cukierman, A. & Lippi, F., 1999. "Labor markets and Monetary Union : A Strategic Analysis," Discussion Paper 1999-100, Tilburg University, Center for Economic Research.
    5. Andrea Ferrero, 2005. "Fiscal and Monetary Rules for a Currency Union," Macroeconomics 0508020, EconWPA.
    6. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
    7. Egil Matsen & Øistein Røisland, 2003. "Interest Rate Decisions in an Asymmetric Monetary Union," Working Paper Series 2803, Department of Economics, Norwegian University of Science and Technology.
    8. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
    9. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    10. Alesina, Alberto & Spolaore, Enrico & Wacziarg, Romain, 2005. "Trade, Growth and the Size of Countries," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 23, pages 1499-1542 Elsevier.
    11. V. V. Chari & Patrick J. Kehoe, 2010. "Time Inconsistency and Free-Riding in a Monetary Union," Levine's Working Paper Archive 506439000000000084, David K. Levine.
    12. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
    13. Chari, V V & Kehoe, Patrick J, 1990. "International Coordination of Fiscal Policy in Limiting Economies," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 617-636, June.
    14. Russell Cooper & Hubert Kempf, 2004. "Overturning Mundell : Fiscal policy in a monetary union," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00266420, HAL.
    15. Acocella, Nicola & Di Bartolomeo, Giovanni & Hibbs Jr., Douglas A., 2004. "Labor market regimes and the effects of monetary policy," Working Papers in Economics 145, University of Gothenburg, Department of Economics, revised 22 Apr 2005.
    16. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, 07.
    17. Canzoneri, Matthew, et al, 2002. "Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation," Review of International Economics, Wiley Blackwell, vol. 10(3), pages 497-516, August.
    18. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
    19. Jordi Galí & Tommaso Monacelli, 2005. "Optimal Monetary and Fiscal Policy in a Currency Union," Working Papers 240, Barcelona Graduate School of Economics.
    20. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers.
    21. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    22. Beetsma, Roel M.W.J. & Jensen, Henrik, 2005. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Journal of International Economics, Elsevier, vol. 67(2), pages 320-352, December.
    23. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
    24. Jean-Pierre DANTHINE & Jennifer HUNT, 1992. "Wage Bargaining Structure, Employment and Economic Integration," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9204, Université de Lausanne, Faculté des HEC, DEEP.
    25. Tatiana Kirsanova & Mathan Satchi & David Vines & Simon Wren-Lewis, 2006. "Optimal Fiscal Policy Rules in a Monetary Union," Discussion Papers 0611, Exeter University, Department of Economics.
    26. Du Caju, Philip & Gautier, Erwan & Momferatou, Daphne & Ward-Warmedinger, Melanie E., 2008. "Institutional Features of Wage Bargaining in 23 European Countries, the US and Japan," IZA Discussion Papers 3867, Institute for the Study of Labor (IZA).
    27. Harris Dellas & George Tavlas, 2002. "Wage Rigidity and Monetary Union," Diskussionsschriften dp0219, Universitaet Bern, Departement Volkswirtschaft.
    28. Ca' Zorzi, Michele & De Santis, Roberto A., 2004. "Currency unions and the real exchange rate," Economics Letters, Elsevier, vol. 85(1), pages 23-27, October.
    29. Christopher Erceg & Christopher Gust & David López-Salido, 2007. "The Transmission of Domestic Shocks in Open Economies," NBER Chapters, in: International Dimensions of Monetary Policy, pages 89-148 National Bureau of Economic Research, Inc.
    30. Canzoneri, Matthew B & Cumby, Robert E & Diba, Behzad T, 2001. "Fiscal Discipline and Exchange Rate Systems," Economic Journal, Royal Economic Society, vol. 111(474), pages 667-690, October.
    31. Lane, Philip R, 2000. " Asymmetric Shocks and Monetary Policy in a Currency Union," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 585-604, December.
    32. Leith, Campbell & Wren-Lewis, Simon, 2006. "Compatibility between monetary and fiscal policy under EMU," European Economic Review, Elsevier, vol. 50(6), pages 1529-1556, August.
    33. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
    34. Barro, Robert & Alesina, Alberto, 2002. "Currency Unions," Scholarly Articles 4551795, Harvard University Department of Economics.
    35. Tenreyro, Silvana & Barro, Robert & Alesina, Alberto, 2002. "Optimal Currency Areas," Scholarly Articles 4553033, Harvard University Department of Economics.
      • Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
    36. Adam S. Posen & Daniel Popov Gould, 2006. "Has EMU Had Any Impact on the Degree of Wage Restraint?," Working Paper Series WP06-6, Peterson Institute for International Economics.
    37. Cooley, Thomas F & Quadrini, Vincenzo, 2002. "Common Currencies versus Monetary Independence," CEPR Discussion Papers 3436, C.E.P.R. Discussion Papers.
    38. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
    39. Vo Le & Patrick Minford, 2006. "Joining the European Monetary Union—Comparing First and Second Generation Open Economy Models," Open Economies Review, Springer, vol. 17(3), pages 281-296, July.
    40. Bottazzi, Laura & Manasse, Paolo, 2002. "Asymmetric Information and Monetary Policy in Common Currency Areas," CEPR Discussion Papers 3484, C.E.P.R. Discussion Papers.
    41. Michel Dumont & Glenn Rayp & Peter Willemé, 2006. "Does internationalization affect union bargaining power? An empirical study for five EU countries," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 77-102, January.
    42. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
    43. Marcelo Sánchez, 2008. "Implications of Monetary Union for Catching-up Member States," Open Economies Review, Springer, vol. 19(3), pages 371-390, July.
    44. Robert Franzese, 2001. "Strategic Interactions of Monetary Policymakers and Wage/Price Bargainers: A Review with Implications for the European Common-Currency Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 28(4), pages 457-486, December.
    45. Broadbent, Ben & Barro, Robert J., 1997. "Central bank preferences and macroeconomic equilibrium," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 17-43, June.
    46. Luca ONORANTE, "undated". "Fiscal Convergence Before Entering the EMU," EcoMod2004 330600107, EcoMod.
    47. William Fuchs & Francesco Lippi, 2006. "Monetary Union with Voluntary Participation -super-1," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 437-457.
    48. David Soskice & Torben Iversen, 2000. "The Nonneutrality of Monetary Policy with Large Price or Wage Setters," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 265-284.
    49. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
    50. Marcelo Sánchez, 2006. "Implications of country size and trade openness for euro area enlargement," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 7(4), pages 11-16, December.
    51. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, vol. 66(2), pages 363-384, July.
    52. Aidt, T.S. & Tzannatos, Z., 2005. "The Cost and Benefits of Collective Bargaining," Cambridge Working Papers in Economics 0541, Faculty of Economics, University of Cambridge.
    53. Robert J. Flanagan, 1999. "Macroeconomic Performance and Collective Bargaining: An International Perspective," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1150-1175, September.
    54. Soskice, David & Iversen, Torben, 1998. "Multiple Wage-Bargaining Systems in the Single European Currency Area," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 110-124, Autumn.
    55. Uhlig, Harald, 2002. "One Money, but Many Fiscal Policies in Europe: What Are the Consequences?," CEPR Discussion Papers 3296, C.E.P.R. Discussion Papers.
    56. Marcelo Sanchez, 2008. "The link between interest rates and exchange rates: do contractionary depreciations make a difference?," International Economic Journal, Taylor & Francis Journals, vol. 22(1), pages 43-61.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20080927. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.