Working Paper: CEPR ID: DP1180
Authors: Antonio J. Morales; A. Jorge Padilla
Abstract: In this paper we study the adjustment of a N-country world economy to an unfavourable common supply shock. We show that world-wide monetary policy coordination is essential to achieve an optimal adjustment to the common shock, but that its actual implementation requires careful design to ensure that each country finds it optimal to join and to remain faithful to the coordination agreement. We then construct alternative coordination mechanisms which implement the first-best response to the common shock, discuss their main properties and rank them according to different criteria of desirability.
Keywords: coordination; EMU; institutions; majority voting; mechanism design; monetary unions; open economy; strategic conflict
JEL Codes: D78; E61; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of coordination (P11) | Deflationary or inflationary biases (E31) |
| Establishment of SNA (F53) | Optimal outcomes (L21) |
| Establishment of SNA + Transfer scheme (H55) | Mitigation of adverse effects of non-coordination (E61) |
| Opt-out rules (Z28) | Destabilization of monetary union (F36) |
| Free-riding behavior (H40) | Undermining stability of monetary union (F36) |