The Inherent Benefit of Monetary Unions

Dominik Groll and Tommaso Monacelli

VfS Annual Conference 2016 (Augsburg): Demographic Change from Verein für Socialpolitik / German Economic Association

Abstract: The desirability of flexible exchange rates is a central tenet in international macroeconomics. We show that, with forward-looking staggered pricing, this result crucially depends on the monetary authority's ability to commit. Under full commitment, flexible exchange rates generally dominate a monetary union (or fixed exchange rate) regime. Under discretion, this result is overturned: a monetary union dominates flexible exchange rates. By fixing the nominal exchange rate, a benevolent monetary authority finds it welfare improving to tradeoff efficiency in the adjustment of the terms of trade in order to improve on its ability to manage private sector's expectations. Thus, fixed exchange rate-induced inertia in the terms of trade is a cost under commitment, whereas it is a benefit under discretion, for it acts like a commitment device.

JEL-codes: E52 F33 F41 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: The inherent benefit of monetary unions (2020)
Working Paper: The Inherent Benefit of Monetary Unions (2016)
Working Paper: The inherent benefit of monetary unions (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc16:145807

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