Monetary Cohabitation in Europe

Torsten Persson () and Guido Tabellini

No 1380, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How can monetary policy in stage III of European Monetary Union be coordinated between the ‘ins’ and the ‘outs’? This paper compares alternative institutional mechanisms, and concludes that a generalized system of inflation targets at the European level has several merits: it strengthens domestic credibility of monetary policy; it rules out deliberate attempts to gain competitiveness through devaluations; it forces monetary policy to respond automatically to various macroeconomic shocks, which is stabilizing for the real exchange rate; and it distributes these shocks symmetrically across countries. On the basis of a simple theoretical model of policy coordination, the paper shows that a system of inflation targets approximates an optimal policy of international cooperation. Preliminary empirical evidence supports these theoretical results.

Keywords: EMU; Inflation Targets; Policy Coordination (search for similar items in EconPapers)
JEL-codes: E42 E52 F33 F42 (search for similar items in EconPapers)
Date: 1996-05
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Citations: View citations in EconPapers (43)

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Journal Article: Monetary Cohabitation in Europe (1996)
Working Paper: Monetary Cohabitation in Europe (1996)
Working Paper: Monetary Cohabitation in Europe
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