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Monetary Union with Voluntary Participation

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  • Fuchs, William
  • Lippi, Francesco

Abstract

A monetary union is modelled as a technology that makes surprise devaluations impossible but requires voluntarily participating countries to follow the same monetary policy. It is shown that for low discount factors and sufficiently correlated shocks welfare in the union is higher than that achievable when countries coordinate while retaining their own independent policy. Optimal policy, when participation in the union is voluntary, is characterized and shown to respond to agents’ incentives to leave by tilting current and future policy in their favour. This contrasts with the static nature of optimal policy when participation is exogenously assumed. This finding implies that policy in the union will not be exclusively guided by area-wide developments but will occasionally take account of member countries’ national developments. Finally, we show that there might exist states of the world in which the union breaks apart, as occurred in several historical episodes. The Paper thus provides a first formal analysis of the forces behind the formation, sustainability and disruption of a monetary union.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4122.

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Date of creation: Nov 2003
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Handle: RePEc:cpr:ceprdp:4122

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Keywords: cross-country spillovers; limited commitment; monetary union;

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References

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Cited by:
  1. CASTRO, Rui & KOUMTINGUÉ, Nelnan, 2011. "On the Individual Optimality of Economic Integration," Cahiers de recherche 05-2011, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  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. William Fuchs & Francesco Lippi, 2004. "Monetary union with voluntary participation," Temi di discussione (Economic working papers) 512, Bank of Italy, Economic Research and International Relations Area.
  4. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 0927, European Central Bank.
  5. Josef Schroth, 2013. "Fiscal policy coordination in monetary unions," 2013 Meeting Papers 74, Society for Economic Dynamics.

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