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Welfare Implications of the Design of a Currency Union in Case of Member Countries of Different Sizes

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Frey, R. Welfare Implications of the Design of a Currency Union in Case of Member Countries of Different Sizes. Credit and Capital Markets – Kredit und Kapital, 38(2), 177-206. https://doi.org/10.3790/ccm.38.2.177
Frey, Rainer "Welfare Implications of the Design of a Currency Union in Case of Member Countries of Different Sizes" Credit and Capital Markets – Kredit und Kapital 38.2, 2005, 177-206. https://doi.org/10.3790/ccm.38.2.177
Frey, Rainer (2005): Welfare Implications of the Design of a Currency Union in Case of Member Countries of Different Sizes, in: Credit and Capital Markets – Kredit und Kapital, vol. 38, iss. 2, 177-206, [online] https://doi.org/10.3790/ccm.38.2.177

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Welfare Implications of the Design of a Currency Union in Case of Member Countries of Different Sizes

Frey, Rainer

Credit and Capital Markets – Kredit und Kapital, Vol. 38 (2005), Iss. 2 : pp. 177–206

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Rainer Frey, Frankfurt/M.

References

  1. Aksoy, Yunus; de Grauwe, Paul and Dewachter, Hans: Do Asymmetries Matter for European Monetary Policy?, in: The European Economic Review, Vol. 46, 2002, pp. 443-469.  Google Scholar
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Abstract

In the study, the relevance of several optimum-currency-area (OCA) criteria is formally worked out in a welfare approach. The optimum monetary-policy rules of the supranational central bank are derived by employing the Barro-Gordon framework, and consideration is given to how the welfare of the member countries of a currency union is affected by symmetric and asymmetric national output shocks. The central-bank council may consist of a central-bank board and of a group of national central-bank presidents, where the national presidents are assumed to focus on their home economies. In a two-country framework, the countries are allowed to differ in size, and different degrees of labour mobility are addressed. The welfare implications are both deduced analytically and with the use of simulations. It is shown that relatively small member countries favour a situation where the group of national central bank presidents is in a strong position while large countries prefer decisions to be taken by the central-bank board. The preferences are the stronger the lower the degree of labour mobility. Besides, differences in the national monetary transmission processes as well as divergent national inflation and output preferences affect welfare. (JEL E52, E58, E61)

Table of Contents

Section Title Page Action Price
Rainer Frey: Welfare Implications of the Design of a Currency Union\rin Case of Member Countries of Different Sizes 177
I. Introduction 177
II. The Model 180
1. The Objective Functions of the Member Countries 180
2. The Objective Function of the Supranational Central Bank 181
3. The Monetary Transmission Processes in the Member Countries 182
4. Labour Mobility 183
III. Monetary Policy Dependent on the Composition of the Central Bank Council 184
IV. Welfare Analyses for Different Shock Scenarios 186
1. Introduction 186
2. Welfare Implications of the Design of the Objective Function of the Central Bank 187
a) Output Shocks in the Home Country 187
aa) Variations in the Expected Loss of the Central Bank Without Labour Mobility 187
bb) Variations in the Expected Loss of the Home Country Without Labour Mobility 188
cc) Variations in the Expected Losses of the Central Bank and of the Home Country with Labour Mobility 189
b) Negatively Correlated Output Shocks in the Member Countries 190
aa) Variations in the Expected Loss of the Central Bank Without Labour Mobility 190
bb) Variations in the Expected Loss of the Home Country Without Labour Mobility 191
cc) Variations in the Expected Losses of the Central Bank and of the Home Country with Labour Mobility 192
3. Welfare Implications of Different Monetary Transmission Processes in the Member Countries 193
a) Variations in the Expected Loss of the Central Bank Without Labour Mobility 194
b) Variations in the Expected Loss of the Home Country Without Labour Mobility 195
c) Variations in the Expected Loss of the Central Bank with Labour Mobility 195
d) Variations in the Expected Loss of the Home Country with Labour Mobility 196
4. Welfare Implications of Different Output Preferences in the Member Countries 197
a) Variations in the Expected Loss of the Central Bank Without Labour Mobility 197
b) Variations in the Expected Loss of the Home Country Without Labour Mobility 198
c) Variations in the Expected Loss of the Central Bank with Labour Mobility 199
d) Variations in the Expected Loss of the Home Country with Labour Mobility 199
V. Conclusions 200
References 203
Summary: Welfare Implications of the Design of a Currency Union in Case of Member Countries of Different Sizes 204
Zusammenfassung: Wohlfahrtsimplikationen des Aufbaus einer Währungsunion im Falle unterschiedlich großer Mitgliedsländer 205
Résumé: Implications d'une union monétaire sur le bien-être des Etats membres de tailles différentes 205