Working Paper: CEPR ID: DP2496
Authors: Alessandra Casella
Abstract: This paper questions the link between the establishment of a common currency among several countries and the necessity of political coordination. It begins by discussing why conducting a single monetary policy is thought to be easier within a single political unit. It then proceeds to enquire whether market mechanisms could be used to choose optimally the common policy of heterogeneous actors, and thus provide an alternative to political decision-making. The advantage of market mechanisms is that they are transparent, predictable, and usually more efficient. In particular, the paper studies a simple game through which national representatives could choose the monetary policy of a single, multinational central bank. There are no fundamental logical objections or impossible practical obstacles to such market games, and even if they are rejected on principle, they are useful in suggesting desirable amendments to traditional voting schemes.
Keywords: European Central Bank; European Monetary Union; Policy Coordination; Public Goods
JEL Codes: D70; E58; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common monetary policy (E52) | unequal distributional effects (D39) |
| traditional political decision-making processes (D72) | failure to address distributional concerns (D39) |
| market mechanisms (D47) | correct and transparent transfers (H87) |
| market mechanisms (D47) | efficient allocations of monetary policy decisions (E52) |
| market mechanisms (D47) | compensatory transfers (H23) |
| liquidity constraints (E41) | underrepresentation of smaller and poorer countries (F63) |