Designing Fiscal and Monetary Institutions for a European Monetary Union

This paper explores the conditions under which aEuropean Monetary Union (EMU) is an optimum currencyarea. The scope for an EMU increases with theconvergence of structural and fiscal policies, smallmoney holdings, a conservative European Central Bank,and dependent national central banks. How nationalpolicies affect the rest of the union once the EMU hasbeen established is also investigated. The case forsurveillance of national structural and fiscalpolicies appears to depend mainly on the monetaryarrangements in the union.     

Does inequality cause inflation?: The political economy of inflation,taxation and government debt

Public Choice - A democratic society in which the distribution of wealth is unequal elects political parties that are likely to represent the interests of poor people. It is in the interests of the...     

The effect of monetary unification on public debt and its real return

We explore the implications of monetary unification for real interest rates and (relative) public debt levels. The adoption of a common monetary policy renders the risk-return characteristics of the participating countries’ public debt more similar. The implied reduction in the scope for risk diversification raises the average expected real return on the debt. Also, the share of the union-wide debt issued by relatively myopic governments or of countries that initially have a relatively dependent central bank increases after unification. This may put the political sustainability of the union under pressure. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but magnifies the spread in relative debt levels.