What could happen in a Monetary Union? The Perspective of Informational Asymmetry

Cornel Oros

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Abstract: The subsidiarity principle governing the collection of statistical data in a monetary union may result in asymmetrical information. The national governments may be tempted to distort their economic and financial data communicated to the union's central bank in order to influence its monetary policy decisions. We base our analysis on a static Keynesian model in a closed monetary union and we prove that the governments' incentives to modify their private information depend mainly on the nature of the economic shocks affecting the union members, on the degree of monetary activism, and on the extent of the union's structural heterogeneity. We analyse the institutional mechanisms that could be used to discipline the governments and encourage them to communicate real information. An incentive contract of the "principal-agent" type or a variable geometry fiscal coordination represent two institutional solutions that could help to create a revealing equilibrium within a monetary union.

Keywords: Economic Policy; Asymmetrical Information; Economic Shocks; Structural Heterogeneity (search for similar items in EconPapers)
Date: 2012
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Published in Journal of Economic Integration, 2012, 24 (4), pp.633-653

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