Discussion paper

DP616 Monetary Policy in Stage Two of EMU

As Stage Two of European Monetary Union (EMU) in Europe develops, a major issue is the coordination of monetary policies. Member countries of the European Monetary System (EMS) will have to align their domestic source moneys. This paper argues that for this purpose, the Treasury and central bank in each country needs to be consolidated. The implications of this are that external financing of budget deficits becomes part of domestic money creation. This concept is set in a steady-state version of the Girton-Roper framework for the monetary approach to the balance of payments. The theory is tested for a number of European countries using the Johansen procedure.


O'Connell, T and M Moore (1992), ‘DP616 Monetary Policy in Stage Two of EMU‘, CEPR Discussion Paper No. 616. CEPR Press, Paris & London. https://cepr.org/publications/dp616