European Monetary Union: Institutional Structure and Economic Performance

This paper examines what economics can say about a regime shift from the exchange rate mechanism to European monetary union. The primary issues concern the credibility of monetary and fiscal policy; the institutional structures that best underpin that credibility; and how agents will learn to adopt to these new structures. The consequences of European monetary union are shown to depend on the decision-making structure and degree of independence of a European central bank, and the precise institutional setup. Finally, it is argued that a successful European monetary union will require a set of rules limiting governments' fiscal actions. Copyright 1992 by Royal Economic Society.