Abstract
This article examines three theories of monetary policy institutional design – orthodox central bank independence (CBI) theory, a “varieties of capitalism” approach centered on institutional complementarities between CBI and wage-setting institutions, and “optimal currency area” (OCA) theory – in light of their contribution to understanding the ongoing crisis of the Eurozone. The inadequacy of the first two theories in this regard is demonstrated and their failings in this context are connected to broader limitations of the theories. OCA theory mostly explains the crisis, but only when supplemented with one additional factor – a central bank marked by precisely the independence and conservatism advocated by orthodox CBI theory.
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