Review of Economic Studies Vol. 70 No. 4 2003
Common Currencies vs. Monetary Independence
Abstract
We study the optimal monetary policy in a two-country open-economy model under two monetary arrangements: (a) multiple currencies controlled by independent policy makers; (b) common currencies with a centralized policy maker. Our findings suggest that: (i) monetary policy competition leads to higher long-term inflation and interest rates with large welfare losses; (ii) the inflation bias and the consequent losses are larger when countries are unable to commit to future policies; (iii) the welfare losses from higher long-term inflation dominates the welfare costs of losing the ability to react optimally to shocks.
- DOI
- 10.1111/1467-937x.00267
- Volume
- 70
- Issue
- 4
- Pages
- 785-806
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref