Coordination and Crisis in Monetary Unions
Emmanuel Farhi () and
Additional contact information
Manuel Amador: Federal Reserve Bank of Minneapolis
Mark Aguiar: Princeton University
No 1337, 2015 Meeting Papers from Society for Economic Dynamics
We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac, nep-mon and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (25) Track citations by RSS feed
Downloads: (external link)
Journal Article: Coordination and Crisis in Monetary Unions (2015)
Working Paper: Coordination and Crisis in Monetary Unions (2015)
Working Paper: Coordination and Crisis in Monetary Unions (2014)
Working Paper: Coordination and Crisis in Monetary Unions
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1337
Access Statistics for this paper
More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().