A common argument against either a monetary union or a regime of fixed exchange rates is that they preclude flexible use of the inflation tax. We address this point of view by comparing three alternative exchange rate regimes: a pure float, an EMS regime in which the exchange rate is fixed but...

This paper discusses the conditions under which currency unions would be desirable and viable. We discuss and present new empirical evidence concerning the operation of existing currency unions in federal states and among regional country groupings. In particular, we examine the traditional...

The literature argues that the benefits of an independent Central Bank accrue at no cost to the real side. In this paper, we argue that the lack of correlation between monetary autonomy and output variability is due to the proactive role of fiscal policy when faced with rigid monetary...

This paper investigates the dynamic effects of monetary and fiscal policy in a monetary union, which is characterized by asymmetric interest rate transmission. This asymmetry gives rise to intertemporal reversals in the relative effectiveness of policy on member country outputs. The direction...

According to conventional wisdom, fiscal policy is more effective under a fixed than under a flexible exchange rate regime. In this paper we reconsider the transmission of shocks to government spending across these regimes within a standard new-Keynesian model of a small open economy. Because of...

This paper explores under what conditions a European Monetary Union (EMU) is an optimum currency area. The scope for an EMU increases with convergence of structural and fiscal policies, small money holdings, a conservative European Central Bank, and dependent national central banks. How national...

We show that, with benevolent policymakers and fiscal leadership, monetary unification reduces inflation, taxes and public spending. These disciplining effects of a monetary union, which rise with the number of fiscal players in the union, are likely to raise welfare. Joining an optimally...

In this paper, we study the co-movement of the government budget balance and the trade balance at business cycle frequencies. In a sample of 10 OECD countries we find that the correlation of the two time series is negative, but less so in more open economies. Moreover, for the US the...

Analysis of the design of institutions to counteract failures of monetary commitment has largely proceeded in a vacuum. It has ignored similar commitment problems in fiscal policy and in structural adjustment; and it has ignored coordination problems between monetary and fiscal policy. Optimal...

In this paper we evaluate internationally agreed limits on public sector debt and deficits, such as those agreed by the EC countries in the Treaty of Maastricht as preconditions for membership in a monetary union. These fiscal convergence criteria require that general government budget deficits...