621. One Size Must Fit All: National Divergences in a Monetary Union
- Author:
- Daniel Gros and Carsten Hefeker
- Publication Date:
- 07-2000
- Content Type:
- Working Paper
- Institution:
- Centre for European Policy Studies
- 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 welfare losses based on national rates of inflation and growth? We find that a central bank that minimises the sum of national welfare losses reacts less to common shocks and that this can lead to higher average union-wide expected welfare, if the variability of common shocks is large relative to the inflation bias. But for countries with a transmission mechanism close to the average, welfare can actually be lower in this case. The inflationary bias depends on the interaction between the transmission mechanism and distortions in labour markets.
- Topic:
- Economics, Government, Human Rights, International Trade and Finance, Migration, and Political Economy
- Political Geography:
- Europe