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How should large and small countries be represented in a currency union?

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  • Berger, Helge
  • Müller, Till

Abstract

The likely extension of the euro area has triggered a debate on the organization of the ECB, in particular on the apparent mismatch between relative economic size and voting rights in the Council. We present a simple model of optimal representation in a federal central bank addressing this question. Optimal voting weights reflect two opposing forces: the wish to insulate common monetary policy from changing preferences at the national level, and the attempt to avoid an overly active or passive reaction to idiosyncratic national economic shocks. A perfect match between economic size and voting rights is rarely optimal, and neither is the one country, one vote principle. Empirically, there are indications that the pattern of over- and under-representation of member countries in the ECB Council might be extreme by the standards of the US Fed and German Bundesbank and not always optimal.

Suggested Citation

  • Berger, Helge & Müller, Till, 2004. "How should large and small countries be represented in a currency union?," Discussion Papers 2004/20, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:200420
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    Cited by:

    1. László Á. Kóczy, 2016. "Power Indices When Players can Commit to Reject Coalitions," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 33(1), pages 77-91, August.
    2. Helge Berger, 2006. "Optimal central bank design: Benchmarks for the ECB," The Review of International Organizations, Springer, vol. 1(3), pages 207-235, September.
    3. Hefeker, Carsten, 2004. "Uncertainty, Wage Setting and Decision Making in a Monetary Union," HWWA Discussion Papers 272, Hamburg Institute of International Economics (HWWA).
    4. Jan-Egbert Sturm & Timo Wollmershäuser, 2008. "The Stress of Having a Single Monetary Policy in Europe," CESifo Working Paper Series 2251, CESifo Group Munich.
    5. Badinger, Harald & Nitsch, Volker, 2014. "National representation in supranational institutions: The case of the European Central Bank," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 19-33.
    6. Ansgar Belke & Barbara Schnurbein, 2012. "European monetary policy and the ECB rotation model," Public Choice, Springer, vol. 151(1), pages 289-323, April.
    7. Agnès Bénassy-Quéré & Edouard Turkisch, 2009. "The ECB Governing Council in an Enlarged Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 47, pages 25-53, January.
    8. Helge Berger & Till Mueller, 2007. "How should large and small countries be represented in a currency union?," Public Choice, Springer, vol. 132(3), pages 471-484, September.
    9. Helge Berger, 2006. "Unfinished business? The ECB reform ahead of euro area enlargement," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 7(4), pages 35-41, December.
    10. Arnold, Ivo J.M., 2006. "Optimal regional biases in ECB interest rate setting," European Journal of Political Economy, Elsevier, vol. 22(2), pages 307-321, June.

    More about this item

    Keywords

    Central Bank; Federal Central Bank; currency union; optimal representation; voting; ECB;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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