DP1800 | Monetary Union: The Ins and Outs of Strategic Delegation

Publication Date

09/03/1998

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Abstract

This paper addresses the conduct of monetary and fiscal policy in a closed trading bloc consisting of ?ins? forming a monetary union and ?outs? who retain monetary sovereignty. All governments can opt for a particular choice of institutional arrangement for their central bank (CB), however, and delegate monetary policy to it with varying degrees of independence or, equivalently, ?conservatism?. This paper examines the outcome when these decisions are individually rational for governments and are taken strategically, taking in to account the intra-country interactions between fiscal authorities and their own central bank, and the inter-country interactions between the same players.