Monetary Union with Voluntary Participation

William Fuchs and Francesco Lippi

No 04-013, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: A Monetary Union is modeled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we identify conditions under which such arrangement may dominate a coordinated system with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, optimal policy is shown to respond to the agents’ incentives to leave the union by tilting both current and future policy in their favor. This yields a non-linear rule according to which each country’s weight in policy decisions is time-varying and depends on the incentives to abandon the union. Second we show that there might conditions such that a break-up of the union, as occurred in some historical episodes, is efficient. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability and disruption of a Monetary Union.

Keywords: monetary union; cross-country spillovers; limited commitment (search for similar items in EconPapers)
JEL-codes: C7 E5 F33 (search for similar items in EconPapers)
Date: 2005-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www-siepr.stanford.edu/repec/sip/04-013.pdf (application/pdf)

Related works:
Working Paper: Monetary union with voluntary participation (2004)
Working Paper: Monetary Union with Voluntary Participation (2003)
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:sip:dpaper:04-013

Access Statistics for this paper

More papers in Discussion Papers from Stanford Institute for Economic Policy Research Contact information at EDIRC.
Bibliographic data for series maintained by Anne Shor ( this e-mail address is bad, please contact ).