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The Logic of Compromise: Monetary bargaining in Austria-Hungary 1867-1913

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Flandreau, Marc

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Abstract

This paper examines the historical record of the Austro-Hungarian monetary union, focusing on its bargaining dimension. As a result of the 1867 Compromise, Austria and Hungary shared a common currency, although they were fiscally sovereign and independent entities. By using repeated threats to quit, Hungary succeeded in obtaining more than proportional control and forcing the common central bank into a policy that was very favourable to it. Using insights from public economics, this paper explains the reasons for this outcome. Because Hungary would have been able to secure quite good conditions for itself had it broken apart, Austria had to provide its counterpart with incentives to stay on board. I conclude that the eventual split of Hungary after WWI was therefore not written on the wall in 1914, since the Austro-Hungarian monetary union was quite profitable to Hungarians.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5397.

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Date of creation: Jan 2006
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Handle: RePEc:cpr:ceprdp:5397

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Related research
Keywords: free riding; market integration; monetary union; secession;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
N32 - Economic History - - Labor and Consumers, Demography, Education, Income, and Wealth - - - U.S.; Canada: 1913-

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References listed on IDEAS
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  1. Marc Flandreau & Mathilde Maurel, 2005. "Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe," Open Economies Review, Springer, vol. 16(2), pages 135-152, April. [Downloadable!] (restricted)
  2. Flandreau, Marc & Komlos, John, 2006. "Target zones in theory and history: Credibility, efficiency, and policy autonomy," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1979-1995, November. [Downloadable!] (restricted)
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  3. Schulze, Max-Stephan, 2000. "Patterns of growth and stagnation in the late nineteenth century Habsburg economy," European Review of Economic History, Cambridge University Press, vol. 4(03), pages 311-340, December. [Downloadable!]
  4. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Flandreau, Marc, 1993. "On the inflationary bias of common currencies : The Latin Union puzzle," European Economic Review, Elsevier, vol. 37(2-3), pages 501-506, April. [Downloadable!] (restricted)
  6. Casella, Alessandra, 1992. "Participation in a Currency Union," American Economic Review, American Economic Association, vol. 82(4), pages 847-63, September. [Downloadable!] (restricted)
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  7. Michael G. Spencer & Peter M. Garber, 1992. "The Dissolution of the Austro-Hungarian Empire: Lessons for Currency Reform," IMF Working Papers 92/66, International Monetary Fund.
  8. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1027-56, November.
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