DP1380 Monetary Cohabitation in Europe
| Author(s): | Torsten Persson, Guido Tabellini |
| Publication Date: | May 1996 |
| Keyword(s): | EMU, Inflation Targets, Policy Coordination |
| JEL(s): | E42, E52, F33, F42 |
| Programme Areas: | International Macroeconomics |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=1380 |
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.