Review of Economic Studies Vol. 71 No. 2 2004
Overturning Mundell: Fiscal Policy in a Monetary Union
Abstract
Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell (1961): a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable. This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.
- DOI
- 10.1111/0034-6527.00288
- Volume
- 71
- Issue
- 2
- Pages
- 371-396
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex