Working Paper: CEPR ID: DP1303
Authors: Roel M.W.J. Beetsma; A. Lans Bovenberg
Abstract: This paper explores under what conditions a European Monetary Union (EMU) is an optimum currency area. The scope for an EMU increases with convergence of structural and fiscal policies, small money holdings, a conservative European Central Bank, and dependent national central banks. How national policies affect the rest of the Union once the EMU has been formed is also investigated. The case for surveillance of national structural and fiscal policies appears to depend largely on monetary arrangements in the Union.
Keywords: European Monetary Union; European Central Bank; Optimal Institutions; Inflation Aversion; Convergence; Structural Policies
JEL Codes: E52; E58; E61; E62; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Convergence of fiscal policies (F42) | Common monetary policy (E52) |
| National fiscal policies generate seigniorage (E62) | Public finances (H69) |
| Surprise inflation (E31) | Employment (J68) |
| Surprise inflation (E31) | Output (Y10) |
| Lack of commitment from monetary authorities (E49) | Necessity for fiscal convergence and surveillance (F42) |
| Initial position of the central bank relative to the government (E58) | Size of an optimum currency area (F36) |
| Conservatism of the ECB (E58) | Size of an optimum currency area (F36) |
| Importance of seigniorage (E42) | Size of an optimum currency area (F36) |
| Fiscal policies and structural policies convergence (F42) | Benefit to all member countries in EMU (F36) |