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Nash Bargaining, Money Creation, and Currency Union

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Author Info

  • Stephane Auray

    (GREMARS-EQUIPPE, Universite Lille III
    Universite de Sherbrooke, GREDI, Faculte d¡¯administration 2500 Boulevard Universite)

  • Aurelien Eyquem

    (CREM CNRS, Universite de Rennes)

  • Gerard Hamiache

    (GREMARS-EQUIPPE, Universite de Lille III, Domaine universitaire du Pont de Bois)

  • Jean-Christophe Poutineau

    (CREM CNRS, Universite de Rennes
    Ecole Normale Superieure de Cachan)

Abstract

This paper is an attempt to combine global macroeconomic objectives with an explicit analysis of resource allocation efficiency. It determines how money creation must be shared between Monetary Union members, given national particularities in the monetary transmission mechanisms. In a two-country "New Open Macroeconomics" model, we outline the optimality of an unequal treatment of nations. To this end, the original Nash bargaining concept is modified to allow a differentiated treatment of countries. By favoring the more flexible country and relying on international money flows to provide liquidity to the more rigid nation, all Union members register efficiency gains which compensate an unfavorable intertemporal inflation activity arbitrage in the Union Central Bank objective.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 9 (2008)
Issue (Month): 2 (November)
Pages: 253-292

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Handle: RePEc:cuf:journl:y:2008:v:9:i:2:p:253-292

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Keywords: Monetary union; Nash bargaining; New open macroeconomics;

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  1. Paul de Grauwe & Francesco Paolo Mongelli, 2005. "Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together?," Working Papers de Economia (Economics Working Papers) 29, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  2. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  4. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  6. Ciccarelli, Matteo & Rebucci, Alessandro, 2004. "Has the Transmission Mechanism of European Monetary Policy Changed in the Run-Up to EMU?," CEPR Discussion Papers 4535, C.E.P.R. Discussion Papers.
  7. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  8. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 15-64, 04.
  9. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  10. Paul De Grauwe, 2000. "Monetary Policies in the Presence of Asymmetries," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 593-612, November.
  11. De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers.
  12. Mojon, Benoît & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 0114, European Central Bank.
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