Overturning Mundell: Fiscal Policy in a Monetary Union
Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by <xref ref-type="bibr" rid="R22">Mundell (1961)</xref>: a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable.This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks. Copyright 2004, Wiley-Blackwell.
Year of publication: |
2004
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Authors: | Cooper, Russell ; Kempf, Hubert |
Published in: |
Review of Economic Studies. - Oxford University Press. - Vol. 71.2004, 2, p. 371-396
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Publisher: |
Oxford University Press |
Saved in:
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