SFB 303 Discussion Paper No. B - 369

Author: Mélitz, Jacques, and Axel A. Weber
Title: The Costs/Benefits of a Common Monetary Policy in France and Germany and Possible Lessons for Monetary Union
Abstract: In order to study the costs/benefits of a monetary union between Germany and France, we 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. We try to identify the macro effects of such a change within a structural VAR model, which is first estimated by employing mixed long-run and short-run identification schemes and subsequently simulated under the restrictions of a common monetary policy. Our analysis centres on the effect of identical monetary policy on movements in output inflation and the current account. We also study the effects on interest rate differentials in order to draw possible inferences about monetary integration. Based on the usual interpretations 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. By contrast, however, France would clearly gain from corresponding German participation in French decision-making.
Keywords: optimum currency areas, structural vector autoregression, shocks, costs/benefits, monetary union
JEL-Classification-Number: F02, F15, F40
Creation-Date: April 1996
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