Monetary Union and Central Bank Independence

26 Pages Posted: 23 May 2006

See all articles by Steven Buigut

Steven Buigut

Georgia State University - Department of Economics

Neven T. Valev

Georgia State University - Department of Economics

Date Written: May 2006

Abstract

We study the consequences of forming a monetary union among a group of countries where the central banks lack independence and are pressured frequently to accommodate government objectives. This is a common situation in the developing countries. As it is common in the literature, we show that forming a monetary union yields net benefits if output shocks are similar across the member countries and if one or more countries in the union can serve as anchors. Our framework highlights an additional gain from monetary union. We show that the opportunistic objectives of one country's policymakers are kept in check at the union level by other members with disparate objectives. Hence, monetary union can improve the monetary policy for its members if the pressures on the individual central banks are dissimilar. We calibrate the model to evaluate the proposed monetary union in the East African Community.

Keywords: F33, F15

JEL Classification: credibility, uncertainty, welfare, monetary union

Suggested Citation

Buigut, Steven and Valev, Neven T., Monetary Union and Central Bank Independence (May 2006). Andrew Young School of Policy Studies Research Paper Series No. 06-54, Available at SSRN: https://ssrn.com/abstract=903798 or http://dx.doi.org/10.2139/ssrn.903798

Steven Buigut (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Neven T. Valev

Georgia State University - Department of Economics ( email )

Andrew Young School of Policy Studies
University Plaza
Atlanta, GA 30303
United States
404-651-0418 (Phone)
404-651-4985 (Fax)