Common Currencies vs. Monetary Independence
We study the optimal monetary policy in a two-country open-economy model under two monetary arrangements: (a) multiple currencies controlled by independent policy makers; (b) common currencies with a centralized policy maker.Our findings suggest that: (i) monetary policy competition leads to higher long-term inflation and interest rates with large welfare losses; (ii) the inflation bias and the consequent losses are larger when countries are unable to commit to future policies; (iii) the welfare losses from higher long-term inflation dominates the welfare costs of losing the ability to react optimally to shocks. Copyright 2003, Wiley-Blackwell.
Year of publication: |
2003
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Authors: | Cooley, Thomas F. ; Quadrini, Vincenzo |
Published in: |
Review of Economic Studies. - Oxford University Press. - Vol. 70.2003, 4, p. 785-806
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Publisher: |
Oxford University Press |
Saved in:
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