Monetary union: The ins and outs of strategic delegation

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, however, can opt for a particular choice of institutional arrangement for their central bank and delegate monetary policy to central banks 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 into account the intra-country interactions between fiscal authorities and their own central banks, and the inter-country interactions between the same players.