Monetary stabilisation policy in a monetary union: some simple analytics

This paper does two things. First it looks at some simple models of monetary decision-making in a monetary union and asks how much more variable a country's output and inflation is likely to be if it joins the union. The question is asnwered analytically, and the simple model is then calibrated. The model has few structual equations, but does allow an analysis of the relationship between output and inflation variability and certain key parameters. Any conclusions, in this respect, are likely to be sensitive to model specification. However, the paper goes on to identify a second-best issue concerning the optimal make-up of the union which is likely to be more robust: namely that only when all members of the union have the same structural parameter values, and shocks are perfectly correlated, will it be optimal for a new member to have these same structural parameter values.