One Size Must Fit All: National Divergences in a Monetary Union

21 Pages Posted: 7 Feb 2001

See all articles by Daniel Gros

Daniel Gros

Centre for European Policy Studies, Brussels; CESifo (Center for Economic Studies and Ifo Institute)

Carsten Hefeker

University of Siegen - School of Economic Disciplines

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

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 rates of inflation and growth? We find that a central bank that minimises the national welfare losses reacts less to common shocks. However, average union-wide expected welfare is lower under a central bank that cares about union-wide variables if the variability of common shocks is large relative to the inflation bias. For a single country, welfare is lower in this case if its transmission mechanism is close to the average. The inflationary bias depends on the interaction between the transmission mechanism and distortions in labour markets.

Keywords: Monetary policy, monetary union, transmission mechanism

JEL Classification: E52, E61, F33

Suggested Citation

Gros, Daniel and Hefeker, Carsten, One Size Must Fit All: National Divergences in a Monetary Union (August 2000). Available at SSRN: https://ssrn.com/abstract=258939 or http://dx.doi.org/10.2139/ssrn.258939

Daniel Gros (Contact Author)

Centre for European Policy Studies, Brussels ( email )

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B-1000 Brussels, 1000
Belgium

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Carsten Hefeker

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany