Central to ongoing debates ove rth edesirability of monetary unions is a supposed trade-off,outlined by Mundell(1961):a monetary unio reduces transactions costs but renders tabilization policy less effective.If shocks across countries are sufficiently correlated,then,according to this argument,delegating monetary policy to a single central bank is not very costly and a monetary union is desirable.This paper explores this argument ina setting with both monetary and fiscal policies.In an economy with monetary policy alone,we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national schocks is too low.However,fiscal itnerventions by national these results.In equilibrium,such a monetary union will be welfare improving for any correlation of schocks.
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