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Designing Stabilization Policy in a Monetary Union

  • Russell Cooper
  • Hubert Kempf

The European Monetary Union (EMU) has become a reality, but economists nonetheless continue to debate the desirability and the optimal design of a monetary union. Since a union's essential element is delegation of monetary power to a single centralized entity, one of the key issues in this debate is whether a monetary union will limit the effectiveness of stabilization policy. If so, it will not necessarily be welfare-improving. Having studied a two-country world economy and considered various designs of monetary union, the authors argue that the success of monetary union depends on 1) the commitment ability of the single central bank; 2) the policy flexibility of national fiscal authorities and the central monetary authority; and 3) the cross-country correlation of shocks.

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Paper provided by Boston University, Institute for Economic Development in its series Boston University - Institute for Economic Development with number 99.

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Date of creation: 19 Jan 2000
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Handle: RePEc:fth:bosecd:99
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  1. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
  2. Bencivenga, Valerie R & Huybens, Elisabeth & Smith, Bruce D, 2001. "Dollarization and the Integration of International Capital Markets: A Contribution to the Theory of Optimal Currency Areas," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 548-89, May.
  3. Poterba, James M, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American Economic Review, American Economic Association, vol. 86(2), pages 395-400, May.
  4. Uhlig, H.F.H.V.S. & Beetsma, R.M.W.J., 1997. "An Analysis of the Stability Pact," Discussion Paper 1997-59, Tilburg University, Center for Economic Research.
  5. Sebastian M. Saiegh & Mariano Tommasi, 1999. "Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 169-209, May.
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  7. Beetsma, Roel & Uhlig, Harald, 1997. "An Analysis of the 'Stability Pact'," CEPR Discussion Papers 1669, C.E.P.R. Discussion Papers.
  8. Willem H. Buiter, 1999. "The EMU and the NAMU: What is the Case for North American Monetary Union?," Canadian Public Policy, University of Toronto Press, vol. 25(3), pages 285-305, September.
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  10. repec:dgr:kubcen:199759 is not listed on IDEAS
  11. Martin Feldstein, 1997. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 23-42, Fall.
  12. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  13. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
  14. Aizenman, Joshua, 1992. "Competitive Externalities and the Optimal Seigniorage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 61-71, February.
  15. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  16. Arthur J. Rolnick & Bruce D. Smith & Warren E. Weber, 1993. "In order to form a more perfect monetary union," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  17. Tomás J. T. Baliño & Jakob Horder & David S. Hoelscher, 1997. "Evolution of Monetary Policy Instruments in Russia," IMF Working Papers 97/180, International Monetary Fund.
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