The Optimality of a Monetary Union without a Fiscal Union

Roel Beetsma and Lans Bovenberg

Journal of Money, Credit and Banking, 2001, vol. 33, issue 2, 179-204

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, 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 stabilise country-specific shocks. While monetary unification may thus be optimal, international risk-sharing may be undesirable because it weakens fiscal discipline.

Date: 2001
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Related works:
Working Paper: The Optimality of a Monetary Union Without a Fiscal Union (1998)
Working Paper: The optimality of a monetary union without a fiscal union (1998)
Working Paper: The optimality of a monetary union without a fiscal union (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:33:y:2001:i:2:p:179-204

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