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2022 | Book

Monetary Unions

Institutions and Policies

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About this book

This textbook explains the notion of monetary union, highlighting the key concepts, procedures, and challenges involved. The book is organized in three parts. In the first part, the reader learns about monetary issues, like definitions and typology of monetary unions, rationale of monetary unions, monetary policy, monetary institutional matters. The second part is devoted to fiscal matters and the interplay between fiscal and monetary policies, such as deficits, transfers, public debt sustainability issues, fiscal policy, policy mix. The last part focuses on other distinct but related issues, necessary to complete the union: banking and fiscal unions, structural adjustments in a monetary union. It ends with a chapter on the fate of monetary unions: how they develop, mature and sometimes dissolve.

The book addresses students at undergraduate and graduate level, interested in a better understanding of international macroeconomics and monetary unions, as well as policy-makers, practitioners and economists in central banks, ministries of economics, economic institutions and banks.

Table of Contents

Frontmatter

Monetary Issues

Frontmatter
1. Monetary Unions: Between International Trade and National Sovereignty
Abstract
This chapter presents the main issues to be associated with the design of a monetary union. It shows that it results from a tension between the necessity to open economies to trade and exchanges and the requests implied by monetary sovereignty. Monetary sovereignty can be shared among different policy-makers, either in a national or in an international context, creating a monetary union. The consequences of the suppression of exchange rates due to monetary unification are discussed. Finally, it is shown how a monetary union can be conceived as a particular type of international monetary system.
Hubert Kempf
2. Why a Monetary Union?
Abstract
This chapter focuses on the properties of a monetary union, the desirability of its membership both from the point of view of an economy considering entering a monetary union and from the point of view of its actual member countries (or regions). It explores the various theories offered by economists to answer these questions. Starting with a discussion of the optimal currency area theory developed by Mundell, it then addresses the issue of credibility of a monetary union. The extend of a monetary union, that is its membership, is discussed as well as the most significant changes induced by the creation of a monetary union.
Hubert Kempf
3. Monetary Policy in a Monetary Union: Lessons from Simple Models
Abstract
This chapter analyses the most prominent issue facing a monetary union, the conduct of a unique and common monetary policy despite the structural heterogeneity of the union. It discusses the various possible objectives of this central bank that shape its policy. It illuminates how the heterogeneity of the union appears as a major challenge through some simple indicators. It develops a simple model of a monetary union that serves to exemplify the main problems addressed in this chapter. It is enriched by the distinction of traded versus non-traded goods and its impact on the conduct of monetary policy. Lastly, non-conventional monetary policy in a monetary union is discussed.
Hubert Kempf
4. Institutions and Monetary Policy
Abstract
This chapter is devoted to the monetary institutional design of a monetary union. The argument that a monetary union allows an incoming country to import credibility is discussed. Centred on the inflation bias issue, it shows that the results obtained in a simple economy do not apply straightforwardly in a monetary union. Delegating monetary policy to an independent central banker does not necessarily reduce the inflation bias as the nomination procedures based on bargaining introduce new strategic channels. The issues of nomination of a monetary policy committee, accountability and transparency are also addressed in this chapter.
Hubert Kempf

Fiscal Issues

Frontmatter
5. Government Deficits, Transfers and Debts
Abstract
Chapter 5 develops a public finance view on monetary unions. Focusing on multinational unions, it analyses the impact of monetary unification on governmental budgets and deficits. Fiscal constraints can be assessed both at the country level and at the union level. Based on explicit formulas for the government budget constraints of member countries, it proves that the constraints due to the sharing of a common currency implies that transfers are unavoidable except under very stringent conditions. This affects the conditions for public debt sustainability. This chapter ends with a discussion of the two ways to discipline fiscal profligacy within a monetary union, through markets or through restricting institutions.
Hubert Kempf
6. Fiscal Policies in a Monetary Union
Abstract
Chapter 6 deals with fiscal policies in a monetary union, including those of a federal Treasury. The macroeconomic impacts of national or union-wide fiscal measures are discussed in particular by means of a variant of the IS-LM-BP model adapted to a monetary union. Monetary and fiscal policies interact. Crucially fiscal policies impact the external position of each member country (or region) and must therefore be checked as they have the potential to jeopardize the union. This makes clear that some form of fiscal discipline must be put in place in a monetary union.
Hubert Kempf
7. The Policy Mix
Abstract
Chapter 7 studies the policy mix in a monetary union. The possibility to reach an optimal policy mix such that a monetary union functions smoothly and perfectly stabilizes cycles appears irrealistic. The very existence of a monetary union makes insulation impossible, contrarily to what happens in a flexible exchange rate world: No member country can be made fully independent from the fiscal impulses coming from the other member countries. Therefore the institutional design of a monetary union is of central importance. Addressing the issue of policy dominance, a variant of the model discussed in Chap. 3 including fiscal variables is analysed. It shows that no specific design can be thought of as superior in any circumstances.
Hubert Kempf

Toward an Ever Closer Union

Frontmatter
8. Structural Adjustments and Reforms
Abstract
This chapter addresses the issue of structural reforms, which is the subject of concern for many policy-makers in a monetary union. A monetary union requires specific adjustment mechanism to supplement the absence of exchange rates. Structural reforms are not necessarily focused on markets with the aim of freeing markets. The public sector may be the object of reforms. Issues of impact and implementation of structural reforms are discussed. A model of structural reforms in a monetary union is presented and used to discuss the outcome of a non-cooperative game on reform adoption. It is shown that it can take the form of a coordination game generating multiple equilibria.
Hubert Kempf
9. Fiscal Union
Abstract
A critical component of a monetary union is the fiscal setting under which member countries operate. Chapter 9 looks carefully at this setting, which can be seen as a fiscal union as member countries must agree on some fiscal operating regulations. Two main options are possible: fiscal federalism or inter-governmental negotiations. It is impossible to claim that one is superior to the other. The issue hampering a fiscal union of any variety is an opportunistic behaviour of member states, exploiting moral hazard. The mutualization of public bonds and the creation of a union-endorsed bond or security are discussed as well as the implementation and assessment of a fiscal union.
Hubert Kempf
10. Banking Union
Abstract
Chapter 10 tackles the banking union necessarily concomitant to a monetary union given the present technologies of payment and exchanges. It presents the three facets of such a union: supervision, resolution and deposit insurance. The specificities of such a banking union come from the necessary bonds coming from a unique currency and a unique central bank. A banking union needs to address the financial cross-border spillovers existing in a monetary union which create increased contagion effects and heighten banking fragility.
Hubert Kempf
11. The Fate of a Monetary Union
Abstract
Chapter 11 considers the evolution of a monetary union, its transformations, its maturing, its possible enlargement, breaking-up and ultimate death. It considers successively the various stages of its development: creation, development, extension of membership, exit and possibly its disappearance. It uses both some analytical results and history to illuminate these issues. It makes clear that the social compact underlying the creation of a monetary union and the strength of the commitment to support it are the key factors of viability.
Hubert Kempf
12. General Conclusion
Abstract
Chapter 12 is the general conclusion of the book. It summarizes the main lessons which may be drawn from the book. A monetary union can be seen as a “total economic fact,”, affecting every component of the member economies and radically modifying their adjustment processes and modes of functioning. This creates multiple collective action issues. In brief, a monetary union must be analysed through the lenses and tools of international political economics.
Hubert Kempf
Backmatter
Metadata
Title
Monetary Unions
Author
Prof. Hubert Kempf
Copyright Year
2022
Electronic ISBN
978-3-030-93232-9
Print ISBN
978-3-030-93231-2
DOI
https://doi.org/10.1007/978-3-030-93232-9

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