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Overturning Mundell : Fiscal policy in a monetary union

Author

Listed:
  • Russell Cooper

    (University of Texas at Austin [Austin])

  • Hubert Kempf

    (EUREQUA - Equipe Universitaire de Recherche en Economie Quantitative - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell (1961): a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable.This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.

Suggested Citation

  • Russell Cooper & Hubert Kempf, 2004. "Overturning Mundell : Fiscal policy in a monetary union," Post-Print halshs-00266420, HAL.
    • Handle: RePEc:hal:journl:halshs-00266420
    DOI: 10.1111/0034-6527.00288
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