Does One Size Fit All? A currency union with asymmetric transmissions and a stability pact

Andrew Hughes Hallett and Laura Piscitelli

International Review of Applied Economics, 2002, vol. 16, issue 1, 71-96

Abstract: The theory of optimal currency areas stresses that a single currency zone should have symmetry across shocks and structures. What happens if the monetary transmission mechanisms differ so that a common monetary policy has different effects in different places? Using a fully specified econometric model, we find that such asymmetries are likely to destabilise the business cycle and put countries out of phase with each other in a way that cannot be corrected by deficit-constrained national fiscal policies. Market discipline, however, could achieve this. Hence, the question is whether the markets would create sufficient discipline on their own.

Date: 2002
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DOI: 10.1080/02692170110109344

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