 Overturning Mundell: Fiscal policy in a monetary unionRussell Cooper and Hubert Kempf () Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL 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 union; fiscal policy; seignorage (search for similar items in EconPapers) Published in Review of Economic Studies, 2004, 71 (2), pp.371-396. ⟨10.1111/0034-6527.00288⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00266420 Access Statistics for this paper More papers in Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL |
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