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Monetary Union with Voluntary Participation -super-1

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  • William Fuchs
  • Francesco Lippi

Abstract

A monetary union is modelled 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 show that such an arrangement may dominate a regime with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, the optimal plan is shown to respond to a country's temptation to leave the union by tilting both current and future policy in its favour. This yields a non-linear rule according to which each country weight in policy decisions is time-varying and depends on its incentive to abandon the union. Second, we show that there might be conditions such that a break-up of the union, as has 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. Copyright 2006, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00382.x
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 73 (2006)
Issue (Month): 2 ()
Pages: 437-457

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Handle: RePEc:oup:restud:v:73:y:2006:i:2:p:437-457

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Cited by:
  1. CASTRO, Rui & KOUMTINGUÉ, Nelnan, 2011. "On the Individual Optimality of Economic Integration," Cahiers de recherche 2011-04, Universite de Montreal, Departement de sciences economiques.
  2. William Fuchs & Vinicius Carrasco, 2008. "Dividing and Discarding A Procedure for Taking Decisions with Non-transferable Utility," 2008 Meeting Papers 315, Society for Economic Dynamics.
  3. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 0927, European Central Bank.
  4. Alvarez, Fernando & Dixit, Avinash, 2014. "A real options perspective on the future of the Euro," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 78-109.

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