Is a Monetary Union a Never-Ending Story?

Francesco Menoncin () and Marco Tronzano

Revue économique, 2005, vol. 56, issue 1, 25-49

Abstract: This paper extends the existing literature on the long-run sustainability of a monetary union using an optimal stopping framework. We assume that inflation is endogenous andmoney growth is the control variable. Under a particular condition on some parameters, the union goes on forever. Moreover, the effective breakdown of the union is governed by two critical thresholds (affected also by countries? political weights): (i) a lower level for domestic inflation and (ii) an upper level for union?s inflation. The optimal time for leaving a monetary union is the first time either domestic inflation goes down the former threshold or union?s inflation goes over the latter threshold.

Date: 2005
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