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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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Bibliographic Info

Paper provided by Department of Economics, University of York in its series Discussion Papers with number 97/15.

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Handle: RePEc:yor:yorken:97/15

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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References

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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. Winkler, B, 1997. "Of Sticks and Carrots. Incentives and the Maastricht Road to EMU," Economics Working Papers eco97/02, European University Institute.
  3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  4. Willem H. Buiter, 1995. "Macroeconomic policy during a transition to monetary union," LSE Research Online Documents on Economics 20701, London School of Economics and Political Science, LSE Library.
  5. Anne Sibert, 1996. "Monetary Integration and Economic Convergence," Archive Working Papers 030, Birkbeck, Department of Economics, Mathematics & Statistics.
  6. Gulcin Ozkan & Alan Sutherland, . "A Currency Crisis Model with an Optimising Policymaker," Discussion Papers 96/11, Department of Economics, University of York.
  7. De Grauwe, Paul, 1996. "Monetary union and convergence economics," European Economic Review, Elsevier, vol. 40(3-5), pages 1091-1101, April.
  8. De Grauwe, Paul, 1995. "Alternative strategies towards monetary union," European Economic Review, Elsevier, vol. 39(3-4), pages 483-491, April.
  9. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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Cited by:
  1. Herrendorf, Berthold & Neumann, Manfred J.M., 1998. "The Political Economy of Inflation, Labour Market Distortions and Central Bank Independence," CEPR Discussion Papers 1969, C.E.P.R. Discussion Papers.
  2. Hefeker, Carsten, 2003. "Fiscal Reform and Monetary Union in West Africa," HWWA Discussion Papers 224, Hamburg Institute of International Economics (HWWA).
  3. 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.
  4. 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.
  5. 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.
  6. Carsten Hefeker, 2003. "Structural Reforms and the Enlargement of Monetary Union," CESifo Working Paper Series 1057, CESifo Group Munich.
  7. 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.
  8. Bilin Neyapti & Secil Ozgur, 2007. "The Effects Of Fiscal And Monetary Discipline On Budgetary Outcomes," Contemporary Economic Policy, Western Economic Association International, vol. 25(2), pages 146-155, 04.
  9. Jürgen Von Hagen, 1999. "Macroeconomic Consequences of the EMU," Empirica, Springer, vol. 26(4), pages 359-374, December.
  10. 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.

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