Establishing a Monetary Union

Russell Cooper and Hubert Kempf ()

No 6791, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores the gains to monetary union. We consider a two-country overlapping generations model. Agents work when young and have random tastes over the composition (domestic vs. foreign goods) of old age consumption. In equilibrium, governments require that local currency be used for transactions as a means of creating a base for seignorage. Thus agents hold multiple currencies to deal with uncertainty in their optimal consumption bundles. We argue that this equilibrium is Pareto dominated by a monetary union, in which there is a single currency and a strong central bank that optimally chooses zero inflation. As suggested by the European Commission's 1990 report, monetary union reduces the inefficiencies created by multiple currencies and leads to price stability. Finally, we argue this Pareto superior outcome cannot be achieved without cooperation of the two governments.

Date: 1998-11
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Cooper, Russel and Hubert Kempf. "Establishing a Monetary Union." International Economic Review 44 (2003): 119-142.

Downloads: (external link)
http://www.nber.org/papers/w6791.pdf (application/pdf)

Related works:
Working Paper: Establishing a Monetary Union (2000)
Working Paper: Establishing a Monetary Union (1998)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:6791

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6791

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().