European Monetary Union, Asymmetric Shocks and Inertia

Paper number: 96/07

Paper date: April 1996

Year: 1996

Paper Category: Discussion Paper

Authors

Rebecca Driver
Ujniversity of Exeter

Simon Wren-Lewis
University of Exeter

Abstract

This paper assesses the scale of the costs of European Monetary Union when shocks are asymmetric. This is done considering time consistent policies within a small theoretical two country model, with parameter values chosen from empirical work. The model builds on earlier work by incoporating a forward looking inflation mechanism. Our results suggest that there are significant costs associated with Monetary Union, particularly when fiscal policy is not used as a stabilisation tool.

JEL Classification Nos: F33, F41, F42
Keywords: European Monetary Union, Asymmetric shocks, Inertia

Corresponding Author: Rebecca Driver, Department of Economics, University of Exeter, Amory Building, Rennes Drive, EXETER EX4 4RJ,Great Britain, tel:(44) 1392 263155, fax: (44) 1392 263242, email: rldriver@exeter.ac.uk

 


This research was made possible by Grant No F124L from the Leverhulme Trust. Wren-Lewis is a fellow of the Centre for Economic Policy Research. Our thanks to Andrew Hughes Hallett and Yue Ma for help, and Warwick McKibbin for the DYNGAME programme. Responsibility for any errors is ours alone.