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Title: The Costs/Benefits of a Common Monetary Policy in France and Germany and Possible Lessons for Monetary Union

Author(s): Jacques Melitz and Axel A Weber

Publication Date: April 1996

Keyword(s): Costs/Benefits, France, Germany, Monetary Union, Optimum Currency Areas and Shocks

Programme Area(s): International Macroeconomics

Abstract: In order to study the costs/benefits of a monetary union between Germany and France, we attempt to go beyond a mere focus on asymmetries and examine what each country would have lost or gained had there been a common monetary policy. We try to identify the macroeconomic effects of such a change within a structural VAR model, which is first estimated by employing mixed long-run and short-run identification schemes, and subsequently simulated under the restrictions of a common monetary policy. Our analysis centres on the effect of identical monetary policy on movements in output, inflation and the current account. We also study the effects on interest rate differentials in order to draw possible inferences about monetary integration. Based on the usual interpretations of national preferences in both countries, the results imply that, if anything, Germany would lose from any French participation in the setting of domestic monetary policy. By contrast, however, France would clearly gain from corresponding German participation in French decision-making.

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Bibliographic Reference

Melitz, J and Weber, A. 1996. 'The Costs/Benefits of a Common Monetary Policy in France and Germany and Possible Lessons for Monetary Union'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1374