Working Paper: CEPR ID: DP472
Authors: David Curle; Paul Levine; Joseph Pearlman
Abstract: This paper contributes to the debate engendered by the Delors Report on the issue of European Monetary Union. It focuses on the options of a strengthened (or hard-) EMS, with a commitment to a fixed exchange rate relative to the Deutschmark, or a European central bank with full monetary union (EMU). Under hard-EMS, an anti-inflationary reputation is acquired by all as a result of Bundesbank credibility. As regards EMU, it is possible that too rapid a move through the latter stages of the Delors process will produce a central bank with little or no anti-inflation credibility. Here we make starkest assumption of no credibility under EMU, and compare it with hard-EMS for various supply and demand shocks using a two-bloc model, the latter exhibiting short-run wage/price stickiness but with long run natural rate properties. A non-EMS regime with floating exchange rates is used to examine the incentive compatibility of hard-EMS and EMU, with a cooperative reputational regime acting as a benchmark.
Keywords: Economic and Monetary Union; Credibility; Inflation; Monetary Policy
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 |
|---|---|
| lack of credibility (D83) | higher inflation (E31) |
| greater credibility (D81) | more effective stabilization policies (E63) |
| credibility of ECB (E58) | stability of economic policies (E63) |