Is a Two-Speed System in Europe the Answer to the Conflict between the German and the Anglo-Saxon Models of Monetary Control?

CEPR Discussion Paper Series No. 1481

Posted: 24 Mar 1997

See all articles by Andrew J. Hughes

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Ole Rummel

South East Asian Central Banks (SEACEN) Research and Training Centre; Bank of England - Centre for Central Banking Studies

Maria Demertzis

Bruegel

Date Written: September 1996

Abstract

The Treaty of Maastricht requires that by 1 January 1999, at the latest, there shall be a nucleus of a monetary union. The issue of monetary union must therefore rest on the presumption that a small ecrediblei group of countries that fulfills the convergence criteria will be able to adopt a single currency, while the remaining peripheral countries will continue to use their national monetary instrument until monetary convergence is attained. In this paper we accept the core/periphery distinction as given and evaluate the conditions under which it is sustainable. We approach the issue through the literature on optimal currency areas and concentrate on the importance of countries hit by symmetric shocks of similar size. We adopt the Bayoumi and Eichengreen methodology of examining correlations of shocks within and between groups and discover that, while the split as is currently understood may be justified, the core is no more an optimal currency area than the periphery. A monetary union based on strict monetary rules, as implied by the German model of monetary control, is better applied to a much narrower range of countries than the core currently includes; extending the union beyond that narrow set under German-style monetary controls would be to create a very fragile union held together by other types of compensating stabilization policies.

JEL Classification: F15, F33, R11

Suggested Citation

Hughes Hallett, Andrew J. and Rummel, Ole Jens and Demertzis, Maria, Is a Two-Speed System in Europe the Answer to the Conflict between the German and the Anglo-Saxon Models of Monetary Control? (September 1996). CEPR Discussion Paper Series No. 1481. Available at SSRN: https://ssrn.com/abstract=3827

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 292 087 001 (Phone)

Centre for Economic Policy Research (CEPR)

London
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Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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Nashville, TN 37235
United States
615-322-8539 (Phone)
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Ole Jens Rummel

South East Asian Central Banks (SEACEN) Research and Training Centre ( email )

Level 5, Sasana Kijang, Bank Negara Malaysia
2 Jalan Dato’ Onn
Kuala Lumpur, 50480
Malaysia

Bank of England - Centre for Central Banking Studies ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://www.bankofengland.co.uk/research/Pages/economists/staff/ole_rummel.aspx

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

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