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Monetary Union, Entry Conditions and Economic Reform

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  • F. Gulcin Ozkan
  • Anne Sibert
  • Alan Sutherland

Abstract

This paper models the behaviour of a potential entrant into a monetary union where there is an inflation entry condition. In addition to making a monetary policy decision during a qualifying period, the potential entrant must make a decision about structural reform. The paper shows that the entry condition can have two undesirable effects. First, it can lead to multiple equilibria because inflationary expectations acquire a self-fulfilling property. Second, the entry condition can lead to a reduction in the amount of reform. This is because the entry condition reduces inflationary expectations and thus reduces the incentive to reform.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 00-03.

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Handle: RePEc:kud:epruwp:00-03

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  1. Artis, Michael, 1996. "Alternative Transitions to EMU," Economic Journal, Royal Economic Society, vol. 106(437), pages 1005-15, July.
  2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  3. Buiter, Willem H, 1995. "Macroeconomic Policy During a Transition to Monetary Union," CEPR Discussion Papers 1222, C.E.P.R. Discussion Papers.
  4. Anne Sibert, 1996. "Monetary Integration and Economic Convergence," Archive Working Papers 030, Birkbeck, Department of Economics, Mathematics & Statistics.
  5. Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, vol. 44(2), pages 339-364, April.
  6. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  7. De Grauwe, Paul, 1995. "Alternative strategies towards monetary union," European Economic Review, Elsevier, vol. 39(3-4), pages 483-491, April.
  8. Winkler, B, 1997. "Of Sticks and Carrots. Incentives and the Maastricht Road to EMU," Economics Working Papers eco97/02, European University Institute.
  9. De Grauwe, Paul, 1996. "Monetary union and convergence economics," European Economic Review, Elsevier, vol. 40(3-5), pages 1091-1101, April.
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Cited by:
  1. Carsten Hefeker, 2010. "Fiscal reform and monetary union in West Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(1), pages 86-102.
  2. Andrew Hughes Hallett & Svend E Hougaard Jensen & Christian Richter, 2004. "Northern and Eastern Enlargement of EMU: Do Structural Reforms Matter?," SUERF Studies, SUERF - The European Money and Finance Forum, number 2004/3 edited by Morten Balling.
  3. Nadine Leiner-Killinger & Víctor López Pérez & Roger Stiegert & Giovanni Vitale, 2007. "Structural reforms in EMU and the role of monetary policy – a survey of the literature," Occasional Paper Series 66, European Central Bank.
  4. Bilin Neyapti, 2003. "The Effects Of Fiscal And Monetary Discipline On Budgetary Outcomes," Working Papers 2003/1, Turkish Economic Association.
  5. Berthold Herrendorf & Manfred J.M. Neumann, 2003. "The Political Economy of Inflation, Labour Market Distortions and Central Bank Independence," Economic Journal, Royal Economic Society, vol. 113(484), pages 43-64, January.
  6. Bilin Neyaptý & Secil Ozgur, 1999. "The Effects of Fiscal and Monetary Discipline on Budgetary Outcomes : The Case of the European Union," Departmental Working Papers 996, Bilkent University, Department of Economics.
  7. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2006. "Exchange Rate Regimes and Reforms: A Panel Analysis for the World versus OECD Countries," International Finance, Wiley Blackwell, vol. 9(3), pages 317-342, December.
  8. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2005. "Structural Reforms and the Exchange Rate Regime A Panel Analysis for the World versus OECD Countries," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 263/2005, Department of Economics, University of Hohenheim, Germany.
  9. Carsten Hefeker, 2000. "Structural Reforms and the Enlargement of Monetary Union," CESifo Working Paper Series 270, CESifo Group Munich.
  10. Jürgen Von Hagen, 1999. "Macroeconomic Consequences of the EMU," Empirica, Springer, vol. 26(4), pages 359-374, December.

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