We study the optimal monetary policy in a two-country open-economy model under two monetary arrangements: (a)multiple currencies controlled by independent policy makers; (b)common currencies with a centralized policy maker.Our findings suggest that: (i)monetary policy competition leads to higher long-term inflation and interest rates with large welfare losses; (ii)the inflation bias and the consequent losses are larger when countries are unable to commit to future policies; (iii) the welfare losses from higher long-term inflation dominates the welfare costs of losing the ability to react optimally to shocks.
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