Exit expectations and the optimal design of a currency union

Yuta Saito

Economics Letters, 2025, vol. 247, issue C

Abstract: This paper explores the impact of exit expectations on the optimal design of a currency union. The union is composed of core member countries, which face the time-inconsistency problem, and peripheral countries, which do not. Peripheral members play a crucial role as a commitment mechanism, enhancing the policy credibility of core countries. We demonstrate that an increase in exit expectations leads to a higher optimal number of peripheral members from the perspective of the core countries. This suggests that heterogeneous membership may be advantageous, particularly in times of political uncertainty when the public anticipates potential exits from the currency union.

Keywords: Optimal currency areas; Inflation bias; Time inconsistency; Monetary policy; Monetary union; Central banking (search for similar items in EconPapers)
JEL-codes: C7 D7 E5 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:247:y:2025:i:c:s016517652400627x

DOI: 10.1016/j.econlet.2024.112143

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