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Currency Unions, the Phillips Curve, and Stabilization Policy: Some Suggestions for Europe

Thomas Palley

European Journal of Economics and Economic Policies: Intervention, 2006, vol. 3, issue 2, 351-369

Abstract: This paper examines the implications of a currency union for monetary policy. The formation of a currency union worsens the inflation-unemployment tradeoff, so that leaving the inflation target unchanged at its pre-currency union level generates increased unemployment. Geographically based fiscal automatic stabilizers can improve the inflation-unemployment trade-off, which has bearings on the Euro area’s Stability and Growth Pact. Financial intermediary balance sheet regulation based on asset-based reserve requirements (ABRR) can provide additional country-specific policy instruments. ABRR alleviate the targets and instruments problem afflicting the monetary authority in a currency union context. This is important for the European Central Bank, which is trying to manage divergent country growth rates with a single interest rate instrument.

Keywords: currency unions; Phillips curve; monetary policy; fiscal policy; asset based reserve requirements (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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