Monetary Union, Entry Conditions and Economic Reform

Gulcin Ozkan, Anne Sibert and Alan Sutherland (ajs10@st-and.ac.uk)

No 00-03, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper models the behaviour of a potential entrant into a monetary union where there is an inflation entry condition. In addition to making a monetary policy decision during a qualifying period, the potential entrant must make a decision about structural reform. The paper shows that the entry condition can have two undesirable effects. First, it can lead to multiple equilibria because inflationary expectations acquire a self-fulfilling property. Second, the entry condition can lead to a reduction in the amount of reform. This is because the entry condition reduces inflationary expectations and thus reduces the incentive to reform.

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Related works:
Working Paper: Monetary Union, Entry Conditions and Economic Reform (1997)
Working Paper: Monetary Union, Entry Conditions and Economic Reform
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