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One Size Must Fit All: National Divergences in a Monetary Union. CEPS Working Documents No. 149, July 2000

Gros, Daniel and Hefeker, Carsten. (2000) One Size Must Fit All: National Divergences in a Monetary Union. CEPS Working Documents No. 149, July 2000. [Working Paper]

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    Abstract

    What policy objective should a common central bank in a heterogeneous monetary union pursue? Should it base its decisions on the EU-wide average of inflation and growth or should it instead focus on (appropriately weighted) national welfare losses based on national rates of inflation and growth? We find that a central bank that minimises the sum of national welfare losses reacts less to common shocks and that this can lead to higher average union-wide expected welfare, if the variability of common shocks is large relative to the inflation bias. But for countries with a transmission mechanism close to the average, welfare can actually be lower in this case. The inflationary bias depends on the interaction between the transmission mechanism and distortions in labour markets.

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Working Documents
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 11 Nov 2009
    Page Range: p. 19
    Last Modified: 15 Feb 2011 18:16
    URI: http://aei.pitt.edu/id/eprint/11694

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