Journal Article

Monetary Union with Voluntary Participation

William Fuchs and Francesco Lippi

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 2, pages 437-457
Published in print April 2006 | ISSN: 0034-6527
Published online April 2006 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2006.00382.x
Monetary Union with Voluntary Participation

Show Summary Details

Preview

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.

Keywords: F33

Journal Article.  9968 words.  Illustrated.

Subjects: International Finance

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.