Implications of Monetary Union for Catching-Up Member States
43 Pages Posted: 1 Jun 2006
Date Written: May 2006
We examine the implications of monetary union for macroeconomic stabilisation in catching up participating countries. We allow member states' supply conditions to differ inside the union, especially with regard to sectoral characteristics. Sectoral productivity shocks on balance hamper the stabilisation properties of a currency union. In the face of aggregate supply disturbances, the stabilisation costs of renouncing monetary autonomy diminish with a flatter output-inflation tradeoff and - barring idiosyncratic shocks - with a larger reference country size, more homogeneous supply slopes and a higher preference for price stability.
Keywords: Monetary union, Balassa-Samuelson effect, Exchange rates, Price stability
JEL Classification: E52, E58, F33, F40
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