Recent research in contract theory views ownership as a substitute for complete contracts. In this paper this approach is applied to monetary integration. Countries face a coordination problem when conducting monetary policy: negative spillovers ensure uncoordinated policy generates too high inflation. Ex ante, policy-makers can undertake politically costly economic reform. This has a positive spillover because it improves the outcome of the monetary policy game. Ex post, contracting over policy may be possible, however, it is supposed that ex-ante contracting over reform and monetary policy, is not. This paper analyses when monetary union is a good substitute for this inability to commit.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1561.
Find related papers by JEL classification: E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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