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The inherent benefit of monetary unions

Dominik Groll () and Tommaso Monacelli ()

Journal of Monetary Economics, 2020, vol. 111, issue C, 63-79

Abstract: If the monetary authority lacks commitment, a monetary union can dominate flexible exchange rates. With forward-looking staggered pricing, inertia in the terms of trade—induced by a fixed exchange rate—is a benefit under discretion, since it acts like a commitment device. By trading off flexibility in the adjustment of the terms of trade, the monetary authority improves on its ability to manage private sector’s expectations. The higher the incidence of asymmetric inefficient shocks, and/or the higher the degree of nominal price rigidity, the greater the inherent benefit of monetary unions, in stark contrast to the traditional optimum currency area theory.

Keywords: Monetary union; Flexible exchange rates; Commitment; Discretion; Welfare losses; Nominal rigidities (search for similar items in EconPapers)
JEL-codes: E52 F33 F41 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: The Inherent Benefit of Monetary Unions (2016) Downloads
Working Paper: The inherent benefit of monetary unions (2016) Downloads
Working Paper: The Inherent Benefit of Monetary Unions (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:111:y:2020:i:c:p:63-79

DOI: 10.1016/j.jmoneco.2019.01.016

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