SFB 303 Discussion Paper No. B - 156

Author: von Hagen, Jürgen and Michele Fratianni
Title: Monetary and Fiscal Policy in a European Monetary Union
Some Public Choice Considerations
Abstract: In this paper, we review and discuss some of the main policy issues facing a future EMU. We do not dwell on the process of achieving EMU, but take it as the starting point: The Community has adopted a common currency or irrevocably fixed exchange rates. In Section 2, we discuss the determinants of EMU inflation. Building on a public choice approach, we interpret monetary union as a form of collusion among national central banks. In contrast to the standard economic argument about collusion, however, we argue that such collusion can improve or diminish the quality of monetary policy, depending on the institutional design of a EMU. We discuss some important conditions for achieving price stability in the monetary union. In Section 3, we address the role of fiscal policy in a monetary union. We discuss, and reject, the Delors Committee's recommendations for greater coordination of fiscal policies in a EMU. The final section summarizes the main conclusions.
Creation-Date: June 1990
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