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Monetary union with voluntary participation

Fuchs, William and Lippi, Francesco (2006) Monetary union with voluntary participation. Review of Economic Studies, Vol. 73 (2), p. 437-457. eISSN 1467-937X. Article.

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DOI: 10.1111/j.1467-937X.2006.00382.x

Abstract

A monetary union is modelled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we show that such an arrangement may dominate a regime with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, the optimal plan is shown to respond to a country's temptation to leave the union by tilting both current and future policy in its favour. This yields a non-linear rule according to which each country weight in policy decisions is time-varying and depends on its incentive to abandon the union. Second, we show that there might be conditions such that a break-up of the union, as has occurred in some historical episodes, is efficient. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability, and disruption of a monetary union.

Item Type:Article
ID Code:2340
Status:Published
Refereed:Yes
Uncontrolled Keywords:Limited commitment, monetary union
Subjects:Area 13 - Scienze economiche e statistiche > SECS-P/01 Economia politica
Divisions:001 Università di Sassari > 01 Dipartimenti > Economia, impresa, regolamentazione
Publisher:Blackwell / Wiley
eISSN:1467-937X
Copyright Holders:© 2006 The Review of Economic Studies
Deposited On:18 Aug 2009 10:07

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