Establishing a Monetary Union
AbstractThis paper explores the gains to monetary union. We consider a two-country overlapping generations model. Agents work when young and have random tastes over the composition (domestic vs. foreign goods) of old age consumption. In equilibrium, governments require that local currency be used for transactions as a means of creating a base for seignorage. Thus agents hold multiple currencies to deal with uncertainty in their optimal consumption bundles. We argue that this equilibrium is Pareto dominated by a monetary union, in which there is a single currency and a strong central bank that optimally chooses zero inflation. As suggested by the European Commission's 1990 report, monetary union reduces the inefficiencies created by multiple currencies and leads to price stability. Finally, we argue this Pareto superior outcome cannot be achieved without cooperation of the two governments.
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Date of creation: Nov 1998
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Other versions of this item:
- Russell Cooper & Hubert Kempf, 1998. "Establishing a Monetary Union," Boston University - Institute for Economic Development 88, Boston University, Institute for Economic Development.
- Cooper, R. & Kempf, H., 2000. "Establishing a Monetary Union," Papiers d'Economie MathÃÂ©matique et Applications 2000.28, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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