The Cost of Heterogeneity in a Monetary Union

39 Pages Posted: 19 Mar 2002

See all articles by Andrew J. Hughes

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Diana N. Weymark

Vanderbilt University - College of Arts and Science - Department of Economics; Western Washington University

Date Written: February 2002

Abstract

In this paper, we explore whether heterogeneity among union members could threaten the stability of the EMU. The types of heterogeneity we consider are (1) asymmetries in the transmission of monetary and fiscal policies, and (2) differences in national preferences for price stability, output growth, and income redistribution. Our results show that the costs of membership are cumulative and can be significant for countries whose structure and/or preferences deviate from those underlying the common monetary policy. In part, these costs arise because monetary policy imposed by an independent central bank automatically constrains the use of fiscal policy by national governments.

Keywords: Transmission asymmetries, preference asymmetries, EMU, currency union, central bank independence

Suggested Citation

Hughes Hallett, Andrew J. and Weymark, Diana N., The Cost of Heterogeneity in a Monetary Union (February 2002). Available at SSRN: https://ssrn.com/abstract=304301

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

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Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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Diana N. Weymark

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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