Monetary Cohabitation in Europe

Torsten Persson () and Guido Tabellini

No 5532, NBER Working Papers from National Bureau of Economic Research, Inc

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. 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.

JEL-codes: E42 F33 (search for similar items in EconPapers)
Date: 1996-04
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Published as American Economic Review, Vol. 86, no. 2 (May 1996): 111-116.

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