The Optimality of a Monetary Union Without a Fiscal Union

Roel Beetsma and Lans Bovenberg

No 1975, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper explores the case for monetary and fiscal unification. Monetary policy suffers from an inflation bias because the monetary authorities are not able to commit. With international risk-sharing in a fiscal union, fiscal discipline suffers from moral hazard. An inflation target alleviates the inflation bias but weakens fiscal discipline. In a monetary union, however, this adverse effect on fiscal discipline is weaker. This advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilize country-specific shocks. While monetary unification may thus be optimal, international risk-sharing may be undesirable because it weakens fiscal discipline.

Keywords: Fiscal Discipline; fiscal transfer scheme; Inflation Targets; Monetary Union; Moral Hazard (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 E62 F42 (search for similar items in EconPapers)
Date: 1998-09
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1975 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The Optimality of a Monetary Union without a Fiscal Union (2001)
Working Paper: The optimality of a monetary union without a fiscal union (1998)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1975

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1975

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().