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Financial Integration and Monetary Competition

Author

Listed:
  • Cardarelli, R.
  • Vidal, J.-P.

Abstract

This paper constructs a two-country overlapping generations model with two distinct fiat monies in which seigniorage revenues are used to finance a local public good. Countries differ both in endowments and in the preference for the public good. Under perfect mobility of financial assets, benevolent governments choose their rates of growth of money supply strategically and private individuals have perfect foresight. The authors characterise the equilibrium of the policy game and show how the degree of financial integration affects the welfare of each country. They then consider a currency union and characterise the minimal weights that each country would require in the union's social welfare function to relinquish its monetary power.

Suggested Citation

  • Cardarelli, R. & Vidal, J.-P., 1998. "Financial Integration and Monetary Competition," Cambridge Working Papers in Economics 9810, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:9810
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