ISBN-10:
0199277001
ISBN-13:
9780199277001
Pub. Date:
08/26/2005
Publisher:
Oxford University Press, USA
Economics of Monetary Union / Edition 6

Economics of Monetary Union / Edition 6

by Paul De Grauwe

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Overview

Does a nation increase its welfare when in abolishes its national currency and adopts the currency of a wider area?

What effect will the financial crisis have onmonetary unions?

How will the financial crisis affect the way the European Central Bank conducts its monetary policie?

Economics of Monetary union tackles these questions by anlaysing both the costs and benefits asociated with having one currency, as well as the practical workings and current issues involved with the Euro.

The author begins by examining the implications of adopting a common currency; assessing how countries benefit from being Eurozone members, while also questioning whether other parts of the world would gain from monetary unification. The second half of the book looks at the problems of running a monetary union by analysing Europe's experience and the issues faced by the European Central Bank.

Product Details

ISBN-13: 9780199277001
Publisher: Oxford University Press, USA
Publication date: 08/26/2005
Edition description: Older Edition
Pages: 272
Product dimensions: 9.60(w) x 7.40(h) x 0.80(d)

About the Author

Paul De Grauwe, John Paulson Chair in European Political Economy, Head of the European Institute, London School of Economics

Table of Contents

Introduction 1

Part 1 Costs and Benefits of Monetary Union 3

1 The Costs of a Common Currency 5

Introduction 5

1.1 Shifts in demand (Mundell) 5

1.2 Monetary union and insurance against asymmetric shocks 9

1.3 Different preferences of countries about inflation and unemployment 13

1.4 Differences in labour market institutions 16

1.5 Differences in legal systems 18

1.6 Growth rates are different 19

1.7 Conclusion 22

2 The Theory of Optimum Currency Areas: A Critique 23

Introduction 23

2.1 How relevant are the differences between countries? 23

2.2 How effective are national monetary policies? 34

2.3 National monetary policies, time consistency, and credibility 42

2.4 Optimal stabilization and monetary union 50

2.5 Mundell once more 52

2.6 The cost of monetary union and the openness of countries 53

2.7 Conclusion 55

3 The Benefits of a Common Currency 57

Introduction 57

3.1 Direct gains from the elimination of transaction costs 57

3.2 Indirect gains from the elimination of transaction costs: price transparency 58

3.3 Welfare gains from less uncertainty 61

3.4 Monetary union and financial stability 64

3.5 Exchange rate uncertainty and economic growth 65

3.6 Monetary union and trade: the empirical evidence 69

3.7 Benefits of an international currency 72

3.8 Benefits of a monetary union and the openness of countries 73

3.9 Conclusion 74

4 Costs and Benefits Compared 75

Introduction 75

4.1 Costs and benefits compared 75

4.2 Monetary union, price and wage rigidities, and labour mobility 78

4.3 Asymmetric shocks and labour market flexibility 79

4.4 Costs and benefits in the long run 85

4.5 The challenge ofenlargement of EMU 88

4.6 Should the UK join EMU? 93

4.7 Is Latin America an optimal currency area? 97

4.8 The next monetary union in Asia? 99

4.9 Monetary unions in Africa 103

4.10 Conclusion 105

5 Monetary and Political Union 106

Introduction 106

5.1 The many dimensions of political union 106

5.2 The theory of optimal currency areas and political union 107

5.3 How does political integration affect the optimality of a monetary union? 109

5.4 An omitted 'deep' variable 113

5.5 Conclusion 114

Part 2 Monetary Union 115

6 The Fragility of Incomplete Monetary Unions 117

Introduction 117

6.1 Differences in reputation lead to low credibility of a fixed exchange rate 119

6.2 The n - 1 problem in pegged exchange rate systems 128

6.3 The link between banking crises and exchange crises 134

6.4 How to measure the credibility of a fixed exchange rate regime 137

6.5 Conclusion 142

7 The Transition to a Monetary Union 143

Introduction 143

7.1 The Maastricht Treaty 143

7.2 Why convergence requirements? 145

7.3 Technical problems during the transition: how to fix the conversion rates 150

7.4 How to organize relations between the 'ins' and the 'outs' 153

7.5 The new EU member countries and the convergence requirements 155

7.6 Is the UK ready to enter the Eurozone? 158

7.7 Conclusion 162

8 The European Central Bank 163

Introduction 163

8.1 The design of the ECB: the Maastricht Treaty 163

8.2 Why has the German model prevailed? 165

8.3 The ECB: a 'conservative' central bank? 168

8.4 Independence and accountability 172

8.5 The ECB: institutional framework 176

8.6 Bank supervision and financial stability in the Eurozone 184

8.7 Conclusion 189

9 Monetary Policy in the Eurozone 191

Introduction 191

9.1 Central banking and asymmetries of shocks 191

9.2 The Monetary Policy Strategy of the ECB: a description 199

9.3 The Monetary Policy Strategy of the ECB: an evaluation 201

9.4 The instruments of monetary policy in the Eurozone 214

9.5 The Eurosystem as lender of last resort during the financial crisis 218

9.6 Conclusion 221

10 Fiscal Policies in Monetary Unions 222

Introduction 222

10.1 Fiscal policies and the theory of optimum currency areas 222

10.2 Sustainability of government budget deficits 224

10.3 The argument for rules on government budget deficits 232

10.4 Fiscal discipline in monetary unions 235

10.5 Risks of default and bailout in a monetary union 239

10.6 The financial crisis of 2008 and interest rate spreads in the Eurozone 241

10.7 The Stability and Growth Pact: an evaluation 243

10.8 How to reform the Stability and Growth Pact 246

10.9 Conclusion 249

11 The Euro and Financial Markets 251

Introduction 251

11.1 EMU and financial market integration in Europe 251

11.2 Why financial market integration is important in a monetary union 255

11.3 Conditions for the euro to become an international currency 258

11.4 Conclusion 265

Reference 267

Index 279

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