NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monetary Cohabitation in Europe

Torsten Persson, Guido Tabellini

NBER Working Paper No. 5532
Issued in April 1996
NBER Program(s):   IFM

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. 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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Document Object Identifier (DOI): 10.3386/w5532

Published: American Economic Review, Vol. 86, no. 2 (May 1996): 111-116.

 
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