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The Optimality of a Monetary Union Without a Fiscal Union

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  • Beetsma, Roel
  • Bovenberg, A Lans

Abstract

The paper explores the case for monetary and fiscal unification. Monetary policy suffers from an inflation bias because the monetary authorities are not able to commit. With international risk-sharing in a fiscal union, fiscal discipline suffers from moral hazard. An inflation target alleviates the inflation bias but weakens fiscal discipline. In a monetary union, however, this adverse effect on fiscal discipline is weaker. This advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilize country-specific shocks. While monetary unification may thus be optimal, international risk-sharing may be undesirable because it weakens fiscal discipline.

Suggested Citation

  • Beetsma, Roel & Bovenberg, A Lans, 1998. "The Optimality of a Monetary Union Without a Fiscal Union," CEPR Discussion Papers 1975, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1975
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    More about this item

    Keywords

    Fiscal Discipline; fiscal transfer scheme; Inflation Targets; Monetary Union; Moral Hazard;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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