Monetary Policy and National Divergences in a Heterogeneous Monetary Union

Cristina Badarau and N. Gregoriadis
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N. Gregoriadis: Université d’Orléans, Postal: Laboratoire d’Economié d’Orléans (LEO), Université d’Orleans, Faculté de Droit, d’Economie et de, Gestion, Rue de Blois BP-6739, 45067 Orléans Cedex 2, France

Journal of Economic Integration, 2009, vol. 24, 408-434

Abstract: In spite of the structural heterogeneity of the Eurozone, the main objective of the European Central Bank (ECB) is to preserve price stability for the union as a whole, and she pays full attention to Union-wide inflation and output, neglecting national divergences. In this paper, we wonder, at a theoretical level, about the social loss associated with such a “centralized” objective, and we show the existence of an “optimal” contract for the common central bank, which ensures a correct stabilization of national magnitudes. Furthermore, we show that social welfare does not necessarily improve if the ECB worries about inflation divergences without being concerned about output divergences in the Union.

Keywords: monetary policy; monetary union; optimal contract; inflation divergences; output divergences (search for similar items in EconPapers)
JEL-codes: E52 E58 F33 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0480

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