Establishing a Central Bank: Issues in Europe and Lessons from the US

Recent efforts to create a European central bank (ECB) have stimulated debate on new topics for research into the political economy of the European Community's institutions. These include the exact division of responsibilities of national governments and the ECB - especially concerning exchange rate policy; the need for and design of constraints on national fiscal policies; and the nature of the transition from adjustable parities and national monetary policies to irrevocably fixed parities and a single European monetary policy. This volume, derived from a joint conference held by CEPR, the Center for German and European Studies at Georgetown University and the IMF, in Washington DC in May 1991, examines these issues and the choices facing policy-makers. It considers the role of a common currency in facilitating transactions and the likely success of the ECB in achieving price stability. It compares the option of strengthening the existing European Monetary System with existing national currencies to the planned creation of a full monetary union. The book draws heavily on the historical experience of the US to identify the problems that may emerge if there is no clear agreement over responsibility for monetary policy, if the ECB does not take responsibility for the stability of the financial system, or if a system of fiscal federalism does not accompany monetary union. The book also considers the implications of EMU for the international monetary system - for the use of the ECU as a reserve currency and for policy coordination among the G-7 countries. The volume thus provides a comprehensive examination of the issues that will be decisive for Europe in its choice of monetary institutions.