Working Paper: CEPR ID: DP2252
Authors: Charles Wyplosz
Abstract: This paper explores the unfinished business of preparing for an harmonious monetary union, "more perfect" than the coarse model set up in the Maastricht and Amsterdam Treaties. To start with, the ECB may fear that it has to live up to its stated lexicographic mission for fear of losing credibility in the crucial start-up phase. Next, the ECB will have to re-think its official determination to only care about average European conditions. Some form of "monetary federalism" is needed, and an example is provided, using estimated central bank reaction functions. Finally, the institutional set-up is too unwieldy to deliver a good policy mix and permit adequate accountability. One money is hardly compatible with eleven governments, twelve Central Bank Governors and twelve Parliaments, each of which would be unwilling to share some power. In particular, governments will have to decide whether to allow competition among national institutions, chiefly labour markets, or whether they will look for collusion to protect the least performing ones.
Keywords: European Monetary Union; Policy Coordination; Policy Mix; Accountability; Institution Design
JEL Codes: E42; E58; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's stated lexicographic ordering of policy objectives (E52) | unlikely to optimize societal welfare (D69) |
| central banks respond to output and employment gaps (E52) | not adhering strictly to inflation targets (E63) |
| complex decision-making process within the ECB (E58) | leads to instability or slow decision-making (D80) |
| national governors influence ECB policy (E58) | may lead to instability or slow decision-making (D80) |
| ECB's focus on aggregate European data (F36) | complicates fiscal and monetary policy coordination (F42) |
| ECB may need to adapt its policy in response to asymmetric shocks (E52) | affecting individual member countries (F55) |
| output gaps diverge significantly from euro area average (E66) | ECB's policy adjustments (E52) |
| ECB focuses on adverse conditions in a member country (E66) | requires careful consideration of monetary policy's role (E61) |
| persistent unemployment (J64) | significant challenge for monetary policy (E49) |