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This paper explores two aspects of the conduct of monetary policy under a monetary union. First, even if the preferences of policymakers over in£ation and output variability are identical across member countries, di¡erences in economic structure will mean di¡erent desired policy responses to even a common shock. Second, policymakers may be forced to make important concessions in their preferences over in£ation and output variability. To examine these issues, in this paper we estimate the objective functions that the European national central banks were implicitly maximizing over the 15 or so years prior to monetary union, as well as the slopes of the in£ation^output variability trade-o¡ in each country.While the slopes of the trade-o¡s vary dramatically across countries, the objective functions are quite similar, with most countries having weights in excess of three-quarters on in£ation variability and less than one-quarter on output variability. Our ¢ndings suggest that the concessions (in terms of preferences over output and in£ation variability) that current in£ation-targeting countries such as the UK and Sweden would have to make on accession to the European Monetary Union (EMU) are likely to be minimal. On the other hand, the di¡erences in economic structure across the Eurosystem countries might make it di¤cult to formulate a common policy even in the face of common goals, suggesting that there may still be signi¢cant costs to joining for countries currently outside the EMU.

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