Working Paper: CEPR ID: DP1800
Authors: Paul Levine; Joseph Pearlman
Abstract: This paper addresses the conduct of monetary and fiscal policy in a closed trading bloc consisting of ?ins? forming a monetary union and ?outs? who retain monetary sovereignty. All governments can opt for a particular choice of institutional arrangement for their central bank (CB), however, and delegate monetary policy to it with varying degrees of independence or, equivalently, ?conservatism?. This paper examines the outcome when these decisions are individually rational for governments and are taken strategically, taking in to account the intra-country interactions between fiscal authorities and their own central bank, and the inter-country interactions between the same players.
Keywords: monetary union; central bank independence; delegation; game theory
JEL Codes: E52; E58; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic choice of central bank independence by governments in a monetary union (E58) | overall monetary and fiscal policy outcomes (E63) |
| unilateral fiscal expansion by a country (E62) | appreciation of its real exchange rate (F31) |
| appreciation of its real exchange rate (F31) | increase in price of domestic output while maintaining inflation target (E31) |
| increase in price of domestic output while maintaining inflation target (E31) | fall in the real product wage (J39) |
| fall in the real product wage (J39) | increase in employment and output (O49) |
| unilateral monetary expansion (E59) | rise in foreign employment (F66) |
| coordination of fiscal policies among member states (F42) | enhance stability of the monetary union (F36) |