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Title: Monetary Cohabitation in Europe

Author(s): Torsten Persson and Guido Tabellini

Publication Date: May 1996

Keyword(s): EMU, Inflation Targets and Policy Coordination

Programme Area(s): International Macroeconomics

Abstract: How can monetary policy in stage III of European Monetary Union be coordinated between the ?ins? and the ?outs?? This paper compares alternative institutional mechanisms, and concludes that a generalized system of inflation targets at the European level has several merits: it strengthens domestic credibility of monetary policy; it rules out deliberate attempts to gain competitiveness through devaluations; it forces monetary policy to respond automatically to various macroeconomic shocks, which is stabilizing for the real exchange rate; and it distributes these shocks symmetrically across countries. On the basis of a simple theoretical model of policy coordination, the paper shows that a system of inflation targets approximates an optimal policy of international cooperation. Preliminary empirical evidence supports these theoretical results.

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Bibliographic Reference

Persson, T and Tabellini, G. 1996. 'Monetary Cohabitation in Europe'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1380