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Monetary union and macroeconomic stabilization

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  • Groll, Dominik

Abstract

It is conventionally held that countries are worse off by forming a monetary union when it comes to macroeconomic stabilization. However, this conventional view relies on assuming that monetary policy is conducted optimally. Relaxing the assumption of optimal monetary policy not only uncovers that countries do benefit from forming a monetary union under fairly general conditions. More importantly, it also reveals that a monetary union entails the inherent benefit of stabilizing private-sector expectations about future inflation. As a result, inflation rates are more stable in a monetary union.

Suggested Citation

  • Groll, Dominik, 2014. "Monetary union and macroeconomic stabilization," Kiel Working Papers 1881, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1881
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    File URL: https://www.econstor.eu/bitstream/10419/126153/1/846340437.pdf
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    References listed on IDEAS

    as
    1. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
    2. Pappa, Evi, 2004. "Do the ECB and the fed really need to cooperate? Optimal monetary policy in a two-country world," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 753-779, May.
    3. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, April.
    4. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
    5. Mirco Soffritti & Francesco Zanetti, 2008. "The advantage of tying one's hands: revisited," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 135-149.
    6. repec:bla:manchs:v:67:y:1999:i:0:p:1-35 is not listed on IDEAS
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    Cited by:

    1. Groll, Dominik & Monacelli, Tommaso, 2020. "The inherent benefit of monetary unions," Journal of Monetary Economics, Elsevier, vol. 111(C), pages 63-79.
    2. Dominik Groll, 2020. "Monetary Policy as an Optimum Currency Area Criterion," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 331-393, December.

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    More about this item

    Keywords

    Monetary union; macroeconomic stabilization; welfare analysis; history dependence; inflation expectations;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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