Tuesday, February 17, 2015

Lucas on the European Monetary Union

This is a bit old, it's from the interview in Snowdon and Vane's Modern Macroeconomics. The questions and answers for the Monetary Union below. Note that this is an interview from 1997.
S&V: What are your views on European Monetary Union?
Lucas: Again I don’t know enough about the politics, which has to be central.

S&V: Does it make economic sense to you?
Lucas: Well, it’s an issue in inventory theory. The cost of dealing with multiple currencies is that if you are doing business in Europe you, or people you hire to help you, have to have stocks of inventories of a lot of different currencies because payments are coming due in a lot of different currencies. The inventory cost of holding money is the interest foregone you could have earned by holding interest-bearing assets. If you have a common currency you can consolidate your cash inventories so that there is a saving involved. That is a very modest saving, but it is positive. But obviously multiple currencies are not inconsistent with a huge amount of prosperity. If you can consolidate, all the better, but those purely economic gains are pretty modest. If you don’t trust somebody else to run your monetary policy, maybe you want to oppose monetary union. For myself, I would be happy to turn my monetary policy over to the Germans any day [laughter]. [Italics added]
I doubt Greeks are laughing. If you think it was too early too see how turning monetary policy to the Germans was a bad idea see this post on Godley at about the same time.

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