Since the benefits are mainly the result of structural improvements and the costs are due largely to the greater difficulty in steering inflation and economic activity, it is difficult to offset the advantages of a monetary union against its disadvantages. Whether a monetary union, on balance, creates benefits or causes costs depends on a whole range of factors. Robert A. Mundell can be summarised as follows: in order to form a so-called optimal currency area, the member countries must be structured along similar lines and exhibit a high degree of flexibility. The benefits of a monetary union consist in a reduction of transaction costs for changing money, the elimination of internal exchange rate uncertainty, tighter competition thanks to easier price comparisons, the expansion of trade within the common currency area, the prevention of competitive depreciation and speculative attacks on a currency, and growth in the liquidity of the financial markets. The most significant costs of a currency union arise from the loss of the individual countries’ independent monetary policies. The loss of monetary policy autonomy is particularly felt when the size or number of asymmetric shocks is large. Such disruptions affect the economic structure, business activity and inflation of member countries in different ways. Thus, they cannot be combated with a uniform economic policy. A controversy that has not yet completely died down is this: was the reunification of the two Germanys after 1989 a shock that significantly impaired the prospects for a successful integration of Germany into the European Monetary Union?

The better central bankers understand real and monetary macroeconomics, microeconomics, financial market economics, labour economics, industrial economics, international trade, public finance and public choice, the better equipped they are for their task. The favourite intermediary targets or policy instruments of central banks are short-term interest rates. When attempting to influence the rate of inflation by changing interest rates one needs reliable economic models. In the Swiss National Bank, we start with a definition of price stability. There is price stability as long as the annual increase in the consumer price index does not exceed 2%. We then use an inflation forecast over a period of three years. The three years correspond to the known range of  3  Casson, John J., “The Role of Business Economists in Business Planning”, http://www.findarticles.com/p/articles/ mi_m1094/is_n3_v31/ai_18481623. 4  Hirschman, Albert O., Exit, Voice and Loyalty, Cambridge Mass., 1970. 5  De Grauwe, Paul, “Central Banking as Art or Science? - Lessons from the Fed and the ECB”, in: International Finance, 5:1, 2002, p. 129. 6  Loc.cit., p. 130. BIS Review 62/2004  5  monetary policy lags. To forecast inflation, we have developed a number of state-of-the-art econometric models. The results of these models are translated in what we call ‘consensus forecast’. It shows different inflation paths as a function of alternative short-term target rates of interest. The Governing Board has to select the preferred target rate of interest (3M-CHF-LIBOR), which is implemented through daily money market operations.