Bankers' Versus Workers' Europe (I): Adverse Selection in EMU

Laura Bottazzi and Paolo Manasse

No 1846, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The delegation of monetary policy to a supranational Central Bank creates a conflict of interest between residents of different countries. For example, the country in recession favours more inflation to boost output, while the country in boom prefers exactly the opposite. This conflict gives rise to an adverse selection problem. Provided each government has private information about the current state of the economy, it may try to exploit it in order to shift the common monetary policy to his own preferred way. The paper shows that problems of this kind can generate both an inflation and primary deficit bias (in line with the worries of Workers’ Europe addressed by the ‘stability pact’) and an excess monetary discipline and recession bias (in line with the worries addressed by the Bankers’ Europe concern). When information problems are particularly severe, monetary policy becomes relatively insensitive to business cycle conditions, and too little ‘smoothing’ is done by monetary (and fiscal) policy. Inflation oscillates between periods of severe contractions (stop) and periods of extreme expansions (go), amplifying the business cycle .

Keywords: Adverse Selection; EMU; Fiscal Policy; Monetary Policy (search for similar items in EconPapers)
JEL-codes: D82 E42 E61 (search for similar items in EconPapers)
Date: 1998-03
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1846 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1846

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1846

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().