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On the Institutional Design of the European Monetary Union: Conservatism, Stability Pact and Economic Shocks
Author(s) -
Gambacorta Leonardo
Publication year - 2001
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/1468-0300.00049
Subject(s) - conservatism , stability and growth pact , pact , economics , economic and monetary union , monetary policy , stability (learning theory) , price of stability , fiscal policy , central bank , european union , macroeconomics , monetary economics , international economics , member states , political science , machine learning , politics , computer science , law
The aim of this paper is to design the optimal institutional arrangement for a monetary union. Using a two‐country rational expectations model, the study analyses how the conservatism of the area‐wide central bank and the penalty system for fiscal deviation (Stability and Growth Pact) should be designed with respect to different economic shocks. The optimal institutional arrangement is also dependent on who is the ‘leader’ of the policy game. When national governments move first, the independent area‐wide central bank can exercise greater discipline over national fiscal policies, making the Stability Pact unnecessary. (J.E.L.: E58, E63, F42).