Skip to main content

Monetary Union and the Role of Automatic Stabilizers

  • Chapter

Abstract

The consequences of monetary unification for macroeconomic stabilization against asymmetric disturbances to national demands or supplies are analyzed in a general equilibrium model of an international monetary economy. Households and firms form optimal consumption, portfolio, investment and production plans in the presence of shocks to technologies and nominal money demands. The nominal exchange rate regime affects real economic performance because short-run nominal wage rigidity is assumed (the labor market does not clear in general). The effects of public debt are analyzed by using an overlapping generations economy. The paper displays the consequences for macroeconomic stabilization of foregoing nominal exchange flexibility under a common monetary policy and discusses the role of national fiscal policies with and without independent national monetary policies. The paper concludes by arguing that international fiscal transfers do not necessarily augment the capacity of fiscal policies to substitute for separate monetary policies under perfectly flexible nominal exchange rates.

Keywords

  • Monetary Policy
  • Fiscal Policy
  • Real Exchange Rate
  • Public Debt
  • Monetary Union

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

This is a preview of subscription content, access via your institution.

Buying options

Chapter
USD   29.95
Price excludes VAT (USA)
  • DOI: 10.1007/978-1-4615-6173-6_5
  • Chapter length: 39 pages
  • Instant PDF download
  • Readable on all devices
  • Own it forever
  • Exclusive offer for individuals only
  • Tax calculation will be finalised during checkout
eBook
USD   139.00
Price excludes VAT (USA)
  • ISBN: 978-1-4615-6173-6
  • Instant PDF download
  • Readable on all devices
  • Own it forever
  • Exclusive offer for individuals only
  • Tax calculation will be finalised during checkout
Softcover Book
USD   179.99
Price excludes VAT (USA)
Hardcover Book
USD   259.00
Price excludes VAT (USA)

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • P. Backus, D.And Kehoe and F. Kydland. International real business cycles. Journal of Political Economy, 100:745–775, 1992.

    CrossRef  Google Scholar 

  • T. Bayoumi and B. Eichengreen. Shocking aspects of european monetary unification. In F. Giavazzi and F. Torres, editor, The Transition to Economic and Monetary Union in Europe, Cambridge University Press, New York, 1993.

    Google Scholar 

  • T. Bayoumi and P. Masson. Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe. Discussion Paper 1057, Centre for Economic Policy Research, London, 1994.

    Google Scholar 

  • T. Bayoumi and A. Thomas. Relative prices and economic adjustment in the united states and the european union: a real story about emu. IMF Staff Papers, 45:108–133, 1995.

    Google Scholar 

  • J.P. Benassy. Money and wage contracts in an optmizing model of the business cycle. Journal of Monetary Economics, 35:303–315, 1995.

    CrossRef  Google Scholar 

  • O.J. Blanchard and L. Katz. Regional evolutions. Brookings Papers on Economic Activity, 1:1–61, 1992.

    CrossRef  Google Scholar 

  • W. Buiter and K. Kletzer. The welfare economics of cooperative and noncooperative fiscal policy. Journal of Economic Dynamics and Control, 15:215–244, 1991.

    CrossRef  Google Scholar 

  • W. Buiter and K. Kletzer. Ponzi Finance, Government Solvency and the Redundancy or Usefulness of Public Debt. Working paper 292, University of California, Santa Cruz, 1997.

    Google Scholar 

  • W. Buiter. Macroeconomic policy during a transition to monetary union. University of Cambridge, Department of Economics, mimeo, june 1995.

    Google Scholar 

  • M. Canzoneri and H Dellas. Monetary integration in europe: implications for real interest rates, national stock markets and the volatility of prices and exchange rates. Department of Economics, Georgetown University, manuscript, November 1994.

    Google Scholar 

  • C. Chamley and H. Polemarchakis. Assets, general equilibrium, and the neutrality of money. Review of Economic Studies, 51:129–138, 1984.

    CrossRef  Google Scholar 

  • J.O. Cho and T. Cooley. The business cycle with nommal contracts. Working paper, University of Rochester, 1990.

    Google Scholar 

  • J.O. Cho and L. Phaneuf. A business cycle model with nominal wage contracts and government. Working paper, University of Montreal, 1993.

    Google Scholar 

  • J.O. Cho. Money, nominal contracts and the business cycle I: One period contract case. Working paper, Queen’s University, 1990.

    Google Scholar 

  • D. Cohen and C. Wyplosz. The European monetary union: an agnostic evaluation. Discussion Paper 306, Centre for Economic Policy Research, London, April 1989.

    Google Scholar 

  • P. De Grauwe and W. Vanhaverbeke. IS Europe an optimum currency area? Evidence from regional data. Discussion Paper 555, Centre for Economic Policy Research, London, April 1991.

    Google Scholar 

  • G. De La Dehesa and P. Krugman. Monetary union, regional cohesion and regional shocks. In G. de la Dehesa, A. Giovannini, M. Guitian and R. Portes, editor, The Monetary Future of Europe, Cambridge University Press, Cambridge, UK, 1993.

    Google Scholar 

  • K. Dowd and D. Greenaway. Currency competition, network externalities and switching costs: towards an alternative view of optimum currency areas. Economic Journal, 102:1180–1189, 1993.

    CrossRef  Google Scholar 

  • R. Eberts and J. Stone. Wage and Employment Adjustment in Local Labor Markets, mimeo, W.E. Upjohn Institute for Employment Research, Kalamazoo, MI, 1992.

    Google Scholar 

  • B. Eichengreen. Is europe an optimum currency area? In S. Borner and H. Gruble, editor, The European Community after 1992: The View from the Outside, Macmillan, London, 1992.

    Google Scholar 

  • B. Eichengreen. Should the Maastricht Treaty be Saved? Working paper 74, Princeton Studies in International Finance, Princeton, N.J, 1992.

    Google Scholar 

  • R. Feenstra. Functional equivalence between liquidity costs and the utility of money. Journal of Monetary Economics, 17:271–291, 1986.

    CrossRef  Google Scholar 

  • R. Glick and K. Rogoff. Global versus contry-specific productivity shocks and the current account. Journal of Monetary Economics, 35:159–192, 1995.

    CrossRef  Google Scholar 

  • J.O. Hairault and F. Portier. Money, new-keynesian macroeconomics and the business cycle. European Economic Review, 37(8): 1533–1568, December 1993.

    CrossRef  Google Scholar 

  • J. Ingram. State and regional payments mechanisms. Quarterly Journal of Economics, 73:619–632, 1959.

    CrossRef  Google Scholar 

  • J. Ingram. The case for european monetary integration. Princeton Essays in International Finance, 98, April 1973.

    Google Scholar 

  • Y. Ishiyama. The theory of optimum currency areas: a survey. IMF Staff Papers, 22, 1975.

    Google Scholar 

  • P.B. Kenen. The theory of optimum currency areas: an eclectic view. In R. Mundell and A.K. Swoboda, editor, Monetary Problems in the International Economy, University of Chicago Press, Chicago, 1969.

    Google Scholar 

  • P.B. Kenen. Emu after maastricht. Washington, D.C.: Group of Thirty, 1992.

    Google Scholar 

  • R. King. Money and Business Cycles. Working paper, University of Rochester, 1990.

    Google Scholar 

  • K.M. Kletzer. The implications of monetary union for fiscal policy in Europe. Department of Economics Working Paper 338, University of California, Santa Cruz, 1996. revised.

    Google Scholar 

  • P. Krugman. Lessons of massachusetts for emu. In F. Torres and F. Giavazzi, editor, Adjustment and Growth in the European Monetary Union, Cambridge University Press, New York, 1993.

    Google Scholar 

  • R. Mckinnon. Optimum currency areas. American Economic Review, 53, September 1963.

    Google Scholar 

  • J. Melitz. A suggested reformulation of the theory of optimal currency areas. Discussion Paper 590, Centre for Economic Policy Research, London, 1991.

    Google Scholar 

  • E. Mendoza. Real business cycles in a small open economy. American Economic Review, 81(4):797–818, September 1991.

    Google Scholar 

  • R. Mundel. A theory of optimum currency areas. American Economic Review, 51:657–664, 1961.

    Google Scholar 

  • M. Obstfeld and K. Rogoff. Exchange rate dynamics redux. Journal of Political Economy, 103, 1995.

    Google Scholar 

  • J. Sachs and X. Sala-I-Martin. Fiscal federalism and optimum currency areas: evidence for Europe from the United States. Discussion Paper 632, Centre for Economic Policy Research, London, 1992.

    Google Scholar 

  • T. Sargent. Dynamic Macroeconomic Theory. Harper and Row, New York, 1987.

    Google Scholar 

  • L. Stockman, A. and Tesar. Tastes and technology in a two-country model of the business cycle: explaining international comovements. American Economic Review, 84, 1994.

    Google Scholar 

  • L. Tesar. International risk-sharing and nontraded goods. Journal of International Economics, 35:69–89, 1993.

    CrossRef  Google Scholar 

  • F. Van Rompuy, P. and Abraham and D. Heremans. Economic federalism and the emu. European Economy, 1:109–135, 1991. Special edition.

    Google Scholar 

  • J. Von Hagen and G. Hammond. Regional insurance against asymmetric shocks: an empirical study for the European Community. Discussion Paper 1170, Centre for Economic Policy Research, London, 1995.

    Google Scholar 

  • J. Von Hagen. Fiscal arrangements in a monetary union: evidence from the u.s. In D. Fair and C. de Boissieu, editor, Fiscal Policy, Taxes and the Financial System in an Increasingly Integrated Europe, Kluwer Academic Publishers, Boston, MA, 1992.

    Google Scholar 

  • N. Wallace. A modigliani-miller theorem for open-market operations. American Economic Review, 71:267–274, 1981.

    Google Scholar 

  • A. Weber. Emu and asymmetries and adjustment problems in the ems — some empirical evidence. European Economy, 1:187–207, 1991. Special Edition.

    Google Scholar 

  • M. Woodford. Currency competition and the transition to monetary union: does competition between currencies lead to price level and exchange rate stability? In A. Giovannini and C. Mayer, editor, European Financial Integration, Cambridge University Press, Cambridge, 1991.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Editor information

Editors and Affiliations

Rights and permissions

Reprints and Permissions

Copyright information

© 1997 Springer Science+Business Media Dordrecht

About this chapter

Cite this chapter

Kletzer, K.M., Buiter, W.H. (1997). Monetary Union and the Role of Automatic Stabilizers. In: Hairault, JO., Hénin, PY., Portier, F. (eds) Business Cycles and Macroeconomic Stability. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6173-6_5

Download citation

  • DOI: https://doi.org/10.1007/978-1-4615-6173-6_5

  • Publisher Name: Springer, Boston, MA

  • Print ISBN: 978-1-4613-7830-3

  • Online ISBN: 978-1-4615-6173-6

  • eBook Packages: Springer Book Archive