Working Paper: CEPR ID: DP1374
Authors: Jacques Melitz; Axel A. Weber
Abstract: In order to study the costs/benefits of a monetary union between Germany and France, we attempt to go beyond a mere focus on asymmetries and examine what each country would have lost or gained had there been a common monetary policy. We try to identify the macroeconomic effects of such a change within a structural VAR model, which is first estimated by employing mixed long-run and short-run identification schemes, and subsequently simulated under the restrictions of a common monetary policy. Our analysis centres on the effect of identical monetary policy on movements in output, inflation and the current account. We also study the effects on interest rate differentials in order to draw possible inferences about monetary integration. Based on the usual interpretations of national preferences in both countries, the results imply that, if anything, Germany would lose from any French participation in the setting of domestic monetary policy. By contrast, however, France would clearly gain from corresponding German participation in French decision-making.
Keywords: Optimum currency areas; Structural vector autoregression; Shocks; Costs-benefits; Monetary union; France; Germany
JEL Codes: F02; F15; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Germany dictates monetary policy (E58) | France experiences higher output (O52) |
| Germany dictates monetary policy (E58) | France experiences lower inflation (E31) |
| Germany dictates monetary policy (E58) | Germany faces tighter monetary conditions (E52) |
| France dictates monetary policy (E58) | Germany faces higher inflation (E31) |
| France dictates monetary policy (E58) | Germany faces current account surpluses (F32) |
| Joint monetary policy (E52) | reduces variability of interest rate differentials (E43) |
| German participation in decision-making (F55) | France gains (F29) |
| French influence (F54) | Germany loses (N94) |
| 50/50 split in monetary policy influence (E58) | outcomes not significantly altered (I14) |