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The policy mix in a monetary union under alternative policy institutions and asymmetries

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  • Laurent GAGNOL
  • Moise SIDIROPOULOS

Abstract

In this paper we study the monetary and fiscal policy making in a monetary union when authorities face asymmetries in the countries constructing this monetary union. We analyze this problem in an asymmetric environment using a two-country theoretical model and by introducing two alternative types of national asymmetries : asymmetric shocks and the asymmetric transmission mechanism. The central issue of the paper is the design of the appropriate monetary and fiscal policy institutions. In this respect, we investigate which of the two alternative types of monetary policymakers (country representatives or governors) facing to two alternative types of fiscal policy (decentralized or centralized) contributes to better resolve the problem of the trade-off between credibility and flexibility. Our results show that delegate the monetary policy to a council of union-wide governors with decentralized fiscal policies is the appropriate institutional design that would reduce the iinflation bias and stabilize better the regional idiosyncratic shocks in a monetary union in the cases of perfectly asymmetric and perfectly symmetric shocks. In addition, in the case of asymmetric transmission, the monetary union would be better off with a council of monetary policy governors and centralized fiscal policies.

Suggested Citation

  • Laurent GAGNOL & Moise SIDIROPOULOS, 2001. "The policy mix in a monetary union under alternative policy institutions and asymmetries," Working Papers of BETA 2001-23, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  • Handle: RePEc:ulp:sbbeta:2001-23
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    References listed on IDEAS

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    1. 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.
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    More about this item

    Keywords

    EMU; Policy-Mix; Asymmetric shocks; Asymmetric transmission;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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