European Monetary Union: An Old Keynesian Guide to the Issues

This paper adopts an Old Keynesian perspective to evaluate EMU. Such a perspective raises concerns with the effectiveness of monetary policy, the feasibility of monetary policy, and the political economy of monetary policy. EMU brings with it institutional lock-in, and it therefore needs to be evaluated with the long term in mind. Whether or not to join the EMU depends on whether effective sovereign monetary policy is feasible now and in the future, whether the EMU constitutes an optimal currency area, and whether the proposed European Central Bank will have an appropriate institutional design. If formed, the EMU should create institutions which promote expansionary policies and empower the conduct of sovereign European monetary policy