Rigidities and Inflationary Bias in a Monetary Union: The Consequences of EU Enlargement

The authors analyze how the design of the central bank interacts with the implementation of structural reforms in a monetary union. They show that the first-best is achieved when the common central bank is collectively designed, irrespective of whether or not reforms are cooperatively implemented. On the other hand, in the case where the central bank has been designed, an enlargement of the union worsens the incumbent members' welfare unless the inflation target of the monetary authorities diminishes or the accession countries implement a sufficient level of reforms prior to joining in. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.