Abstract
The theory of optimal currency areas states that a single currency zone should have symmetry of shocks and structures across regions. Research on monetary union in Europe has either assumed these conditions to hold close enough not to cause problems, or has focussed on asymmetries in shocks. But what if economic structures and/or market responses differ between countries or regions? This paper examines the consequences of a single monetary policy when there are asymmetries in i) the monetary transmissions; ii) the wage/price transmissions; and iii) private sector asset holdings. We find the first and last destabilise the business cycle, and put countries out of phase with one another in a way that cannot be corrected by deficit constrained fiscal policies. The effect is to delay convergence.
Similar content being viewed by others
References
Bayoumi, T and Eichengreen (1993) ‘Shocking Aspects of European Monetary Unification’, in F. Giavazzi and F. Torres (eds.), Adjustment and Growth in the European Monetary Union, Cambridge University Press, Cambridge.
Boone, L. and Mojon, B. (1998) ‘Sacrifice Ratios in Europe: A Comparison’, CEPII, Paris (mimeo).
Brio, C. (1995) ‘The Structure of Credit to the Nongovernment Sector and the Transmission Mechanism of Monetary Policy: A Cross-country Comparison’, in The Financial Structure and Monetary Transmission Mechanism, Bank for International Settlements, Basle.
Bryant, R., Hooper, P., and Mann, C. (1993) Evaluating Policy Regimes: New Research in Empirical Macroeconomics, Brookings Institution, Washington DC.
Carlino, G. and De Fina, R. (1998) ‘Monetary Policy and the US States and Regions: Some Implications for the European Monetary Union’, WP 98–17, Federal Reserve Bank of Philadelphia, PA.
CEPR (1997) ‘The Ostrich and the EMU’, CEPR, London.
Collard, F. and Dellas, H. (1998) ‘Exchange Rate Systems and Macroeconomic Stability’, Department of Economics (VWI), University of Bern, Switzerland.
de Grauwe, P. and Vanhevebeke, W. (1993) ‘Is Europe an Optimum Currency Area? Evidence from Regional Data’, in P. Mason and M. Taylor (eds.), Policy Issues in the Operation of Currency Areas, Cambridge University Press, Cambridge.
Demertzis, M., Hughes Hallett, A., and Rummell, O. (1998a), Does a Core-Periphery Regime Make Europe into an Optimal Currency Area?, in P. Welfens (ed.), European Monetary Union, Springer Verlag, Berlin.
Demertzis, M., Hughes Hallett, A., and Rummell, O. (1998b), ‘Is a 2-speed System in Europe the Answer to the Conflict between Germany and the Anglo-Saxon Models of Monetary Control?’, in S. Black and M. Moersch (eds.), Competition and Convergence in Financial Markets — The German and Anglo-American Models, Elsevier, North Holland, New York.
Dornbusch, R., Favero, C., and Giavazzi, F. (1998) ‘Immediate Challenges for the European Central Bank’, in EMU: Prospects and Challenges for the Euro, Blackwell & Co., Oxford.
Frankel, J. and Rose, A. (1998) ‘The Endogeneity of the Optimal Currency Area Criteria’, Economic Journal, 108, 1009–1025.
Hughes Hallett, A. (1998) ‘Evidence to the Treasury Select Committee to the House of Commons’, The UK and Preparations for Stage Three of Economics and Monetary Union, HC5–3 — Vol. III, pp. 66–94, HMSO, London.
Hughes Hallett, A. and Ma, Y. (1993) ‘East Germany, West Germany and their Mezzogiorno Problem’, Discussion Paper 632, Centre for Economic Policy Research, London.
Krugman, P. and Venables, A. (1996) ‘Integration, Specialisation and Adjustment’, European Economic Review 40, 959–967.
Laxton, D., Issard, P., Faruqee, H., E Prasad, E., and Turtleboom, B. (1998) ‘MULTIMOD Mark II: The Core Dynamic and Steady State Models’, IMF Occasional Paper, No. 167, IMF, Washington.
Layard, R, Nickell, S., and Jackman, R. (1991), Unemployment: Macroeconomic Performance and the Labour Market, Oxford University Press, Oxford.
MacLennan, D. J., Muellbauer, J., and Stephens M. (1998) ‘Asymmetries in Housing and Financial Market Institutions and EMU’, (mimeo) University of Glasgow and Nuffield College, Oxford.
Masson, P., Symanski, S., and Meredith, G. (1990) ‘MULTIMOD Mark II: A Revised and Extended Model’, IMF Occasional Paper, No. 71, IMF, Washington DC.
Mitchell, P., Sault, J., Smith, P., and Wallis, K. F. (1998) ‘Comparing Global Economic Models’, Economic Modelling 15, 1–48.
Salmon, M. (1982) ‘Error Correction Mechanisms’, Economic Journal 92, 615–629.
Taylor, J. (1993) Macroeconomic Policy on a World Economy, Norton and Co., New York.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Hughes Hallett, A., Piscitelli, L. EMU in Reality: The Effect of a Common Monetary Policy on Economies with Different Transmission Mechanisms. Empirica 26, 337–358 (1999). https://doi.org/10.1023/A:1007030732145
Issue Date:
DOI: https://doi.org/10.1023/A:1007030732145