MONETARY-POLICY CENTRALIZATION, RULES, DISCRETION, AND CONSERVATIVE CENTRAL BANKERS IN THE EUROPEAN MONETARY-SYSTEM (EMS)

This article evaluates the implications of policy centralization in the European Monetary System (EMS) by exploring the effects of the use of monetary rules or discretion by centralized EMS policy authorities. A two-country extension of the macroeconomic model of Alesina and Tabellini (Economic Inquiry 25(4):619-630, 1987) is used to demonstrate that participation in the EMS may cause Pareto improvements, deteriorations, or noncomparabilities relative to insular outcomes. Furthermore, it is shown that appointment of conservative EMS monetary authorities does not necessarily improve social welfare under all possible EMS scenarios.