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When to Leave a Monetary Union?

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  • Frank Strobel

Abstract

[eng] Using a two-country model of monetary union where policymakers minimize the continuous-time equivalent of a Barro-Gordon-type loss function, we examine the value of the option of monetary disintegration when the national preference parameters associated with an inflationary surprise follow correlated geometric Brownian motions. We derive the critical level of the ratio of these parameters that triggers a move to monetary disintegration and find that a country will be willing to return to monetary independence only if the other country's relative inflation preferences are strictly, and potentially substantially, greater than a benchmark value depending on the cost of monetary disintegration alone. [fre] Quand quitter une union monétaire?. . À l'aide d'un modèle d'union monétaire à deux pays où les autorités politiques minimisent l'équivalent, en temps continu, d'une fonction de perte de type Barro-Gordon, on examine la valeur de l'option associée à l'éclatement d'une telle union. Les paramètres nationaux de préférence associés à une inflation surprise suivent des mouvements browniens géométriques corrélés. On dérive la valeur critique du ratio de ces paramètres au-delà de laquelle il y a désintégratrion monétaire : un pays aura tendance à vouloir retrouver son indépendance monétaire seulement si les préférences relatives en termes d'inflation de l'autre pays sont strictement (parfois considérablement) supérieures à une valeur de référence qui dépend uniquement du coût de désintégration monétaire.

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Bibliographic Info

Article provided by Programme National Persée in its journal Revue économique.

Volume (Year): 52 (2001)
Issue (Month): 2 ()
Pages: 389-397

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Handle: RePEc:prs:reveco:reco_0035-2764_2001_num_52_2_410323

Note: DOI:10.2307/3503055
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Web page: http://www.persee.fr/web/revues/home/prescript/revue/reco

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Cited by:
  1. Francesco Menoncin & Marco Tronzano, 2005. "Is a Monetary Union a Never-Ending Story?," Revue économique, Presses de Sciences-Po, vol. 56(1), pages 25-49.
  2. Frank Strobel, 2004. "Monetary integration and inflation preferences: a real options analysis," Money Macro and Finance (MMF) Research Group Conference 2003 95, Money Macro and Finance Research Group.
  3. Frank Strobel, 2004. "Leaving EMU: a real options perspective," Money Macro and Finance (MMF) Research Group Conference 2004 83, Money Macro and Finance Research Group.

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