In order to study the costs/benefits of a monetary union between France and Germany, Research Fellows Jacques Mélitz and Axel Weber 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. In Discussion Paper No. 1374, they try to identify the macroeconomic effects of such a change within a structural VAR model, which is first estimated by employing mixed short-run and long-run identification schemes, and subsequently simulated under the restrictions of a common monetary policy.

The analysis centres on the effects of an identical monetary policy on output, inflation and the current account. The effects on interest rate differentials are also studied in order to draw possible inferences about monetary integration. Based on the usual interpretation 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 while France would clearly gain from corresponding German participation in French decision-making.

The Costs/Benefits of a Common Monetary Policy in France and Germany and Possible Lessons for Monetary Union
Jacques Mélitz and Axel A Weber