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Leader of the pack? German monetary dominance in Europe prior to EMU

James Reade, J. and Volz, U. (2011) Leader of the pack? German monetary dominance in Europe prior to EMU. Economic Modelling, 28 (1-2). pp. 239-250. ISSN 0264-9993

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To link to this item DOI: 10.1016/j.econmod.2010.09.006

Abstract/Summary

In this paper, the monetary policy independence of European nations in the years before European Economic and Monetary Union (EMU) is investigated using cointegration techniques. Daily data is used to assess pairwise relationships between individual EMU nations and ‘lead’ nation Germany, to assess the hypothesis that Germany was the dominant European nation prior to EMU. By and large our econometric investigations support this hypothesis, and lead us to conclude that the only European nation to lose monetary policy independence in the light of monetary union was Germany. Our results have important policy implications. Given that the loss of monetary policy independence is generally viewed as the main cost of monetary unification, our findings suggest a reconsideration of the costs and benefits of monetary integration. A country can only lose what it has, and in Europe the countries that joined EMU — spare Germany — apparently did not have much to lose, at least not in terms of monetary independence. Instead, they actually gained monetary policy influence by getting a seat in the ECB's governing council which is responsible for setting interest policy in the euro area.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:34868
Publisher:Elsevier

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