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Monetary Policy and Inflation Divergences in a Heterogeneous Monetary Union

Author

Listed:
  • Patrick Villieu

    () (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Nelly Gregoriadis

    () (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Florina Semenescu

    () (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

Abstract

It is widely recognized that the Euro area is an asymmetric monetary union which assembles countries with heterogeneous structures on financial, goods and labour markets stricken by asymmetric shocks. However, the main objective of the European Central Bank (ECB) is to preserve price stability for the euro area as a whole, and the ECB pays most of its attention to union-wide output and (principally) inflation, neglecting, at least on the level of principles, inflation and output divergences in union. In this paper, we wonder, at a theoretical level, about the social loss associated with such an objective based on aggregate magnitudes, and we search for solutions, namely an “optimal” contract for a common central bank. We show in particular that it is not necessarily a good thing that a common central bank worries about inflation divergences without being concerned about output divergences in union.

Suggested Citation

  • Patrick Villieu & Nelly Gregoriadis & Florina Semenescu, 2006. "Monetary Policy and Inflation Divergences in a Heterogeneous Monetary Union," Working Papers halshs-00071195, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00071195
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00071195
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    Cited by:

    1. Patrick Villieu, 2008. "Quelle gouvernance pour une union monétaire asymétrique? Un modèle simple," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 51(1), pages 57-78.
    2. Kayam, Saime S., 2011. "Influence of institutional factors and wage-setting mechanism in a dual labour market with currency union: Northern Cyprus," MPRA Paper 39154, University Library of Munich, Germany.

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