Journal Article

Common Currencies vs. Monetary Independence

Thomas F. Cooley and Vincenzo Quadrini

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 70, issue 4, pages 785-806
Published in print October 2003 | ISSN: 0034-6527
Published online October 2003 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00267
Common Currencies vs. Monetary Independence

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  • Prices, Business Fluctuations, and Cycles
  • Monetary Policy, Central Banking, and the Supply of Money and Credit
  • Money and Interest Rates

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We study the optimal monetary policy in a two-country open-economy model under two monetary arrangements: (a) multiple currencies controlled by independent policy makers; (b) common currencies with a centralized policy maker.

Our findings suggest that: (i) monetary policy competition leads to higher long-term inflation and interest rates with large welfare losses; (ii) the inflation bias and the consequent losses are larger when countries are unable to commit to future policies; (iii) the welfare losses from higher long-term inflation dominates the welfare costs of losing the ability to react optimally to shocks.

Keywords: E31; E42; E43; E52

Journal Article.  9476 words.  Illustrated.

Subjects: Prices, Business Fluctuations, and Cycles ; Monetary Policy, Central Banking, and the Supply of Money and Credit ; Money and Interest Rates

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