Working Paper: CEPR ID: DP3223
Authors: Andrew Hughes Hallett; Diana N. Weymark
Abstract: In this Paper, we explore whether heterogeneity among union members could threaten the stability of the EMU. The types of heterogeneity we consider are (1) asymmetries in the transmission of monetary and fiscal policies, and (2) differences in national preferences for price stability, output growth, and income redistribution. Our results show that the costs of membership are cumulative and can be significant for countries whose structure and/or preferences deviate from those underlying the common monetary policy. In part, these costs arise because monetary policy imposed by an independent central bank automatically constrains the use of fiscal policy by national governments.
Keywords: central bank independence; currency union; EMU; preference asymmetries; transmission asymmetries
JEL Codes: E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneity (D29) | stability of the EMU (F36) |
| differences in national preferences for price stability, output growth, and income redistribution (P44) | tensions threatening stability of the EMU (E66) |
| heterogeneity among member countries (F12) | ineffective ECB policy (E52) |
| costs of membership in the EMU (F36) | significant costs for countries with structures or preferences that deviate from those underlying the common monetary policy (F31) |