Stability of Monetary Union with Outsiders

Hiroya Akiba

Global Economic Review, 2015, vol. 44, issue 2, 151-166

Abstract: This article examines stability of a three-country model which comprises a monetary union with two "ins" (i.e. members) and an "out" (i.e. non-member). This stability issue was examined by McAvinchey and McCausland who considered a hypothetical enlargement of Eurozone with a new member country, and empirically showed that the effects of enlargement are "predominantly destabilizing". Using the Argy's method of exact log-linearization, we show that the model is intrinsically unstable. A numerical example is given with the 2010 parameter values. We found that the stability could ironically be rehabilitated when uncovered interest parity and purchasing power parity are violated.

Date: 2015
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DOI: 10.1080/1226508X.2015.1019537

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