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Monetary Union Viability: A Criterion Proposal

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  • Alberto Alonso
  • Vanesa Guzmán

Abstract

We propose a model that represents the dynamic behaviour of a monetary union comprising two countries whose natural interest rates are initially unequal. This initial disparity and the subsequent application of a common monetary policy generate different national inflation rates and lead to losses of competitiveness, foreign deficits, and the indebtedness of one country with respect to the other. We propose as a viability criterion for the modelled monetary union a combination of non-explosive foreign debt and the ability of the central bank to neutralize the contracting effects of taking on additional debt to avoid falling into a liquidity trap.

Suggested Citation

  • Alberto Alonso & Vanesa Guzmán, 2014. "Monetary Union Viability: A Criterion Proposal," Metroeconomica, Wiley Blackwell, vol. 65(4), pages 717-750, November.
    • Handle: RePEc:bla:metroe:v:65:y:2014:i:4:p:717-750
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    References listed on IDEAS

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