To Be or Not to Be in Monetary Union: A Synthesis

37 Pages Posted: 20 Dec 2010

See all articles by Laurent Clerc

Laurent Clerc

Banque de France

Harris Dellas

University of Bern - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Olivier Loisel

CREST-ENSAE

Date Written: December 1, 2010

Abstract

Monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks. But it also carries costs as some stabilization may be feasible even in the absence of credibility, and this may be more than what an individual country can hope for in a monetary union. In this paper, we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements. We produce examples where monetary union may be welfare improving even for low-modest levels of inflation bias (2-3%) as long as business cycles are not too a-synchronized across countries.

Keywords: Currency union, credibility, stabilization, inflation bias

JEL Classification: E4, E5, F4

Suggested Citation

Clerc, Laurent and Dellas, Harris and Loisel, Olivier, To Be or Not to Be in Monetary Union: A Synthesis (December 1, 2010). Banque de France Working Paper No. 308, Available at SSRN: https://ssrn.com/abstract=1728691 or http://dx.doi.org/10.2139/ssrn.1728691

Laurent Clerc (Contact Author)

Banque de France ( email )

Paris
France

Harris Dellas

University of Bern - Department of Economics ( email )

Gesellschaftstrasse 49
Bern, CH-3012
Switzerland
+41 31 631 3989 (Phone)
+41 31 631 3992 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Olivier Loisel

CREST-ENSAE ( email )

5 avenue Henry Le Chatelier
Palaiseau, 91120
France

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