Overturning Mundell: fiscal policy in a monetary union

Russell Cooper and Hubert Kempf ()

No 311, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell [1961]: a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable.> This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.

Keywords: monetary unions; Econometric models (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-ifn and nep-pke
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Citations: View citations in EconPapers (2)

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Journal Article: Overturning Mundell: Fiscal Policy in a Monetary Union (2004)
Working Paper: Overturning Mundell: Fiscal policy in a monetary union (2004)
Working Paper: Overturning Mundell: Fiscal policy in a monetary union (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:311

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