Working Paper: CEPR ID: DP517
Authors: Andrew Hughes Hallett; David Vines
Abstract: This paper analyses four costs which may be associated with monetary union. First it (obviously) allows no `relative' monetary accommodation of the kind which may assist when dealing with asymmetric shocks. This can impose significant adjustment costs. Second it does not of itself prevent `absolute' accommodation to an inflation shock originating in all members, or even one member, of the union. Third, the distribution of benefits of membership of the union may be skewed. Finally, a union may require significant fiscal flexibility to mitigate against the adjustment costs. We investigate the form of fiscal flexibility which may be required, and we also propose a form of Soft Monetary Union which might alleviate the first problem.
Keywords: EMU; Fiscal Rules
JEL Codes: 31; 321; 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of relative monetary accommodation in a monetary union (E49) | Increased adjustment costs in response to asymmetric shocks (F32) |
| Inflation shocks (E31) | Absolute accommodation issues in the monetary union (F36) |
| Distribution of benefits from EMU membership (F36) | National-level costs (H59) |
| Need for fiscal flexibility (E62) | Coordinated fiscal policies (F42) |