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When to Leave a Monetary Union ?

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  • Frank Strobel

Abstract

Using a two-country model of monetary union where policymakers minimize the continuous-time equivalent of a Barro-Gordon-type loss function, we examine the value of the option of monetary disintegration when the national preference parameters associated with an inflationary surprise follow correlated geometric Brownian motions. We derive the critical level of the ratio of these parameters that triggers a move to monetary disintegration and find that a country will be willing to return to monetary independence only if the other country?s relative inflation preferences are strictly, and potentially substantially, greater than a benchmark value depending on the cost of monetary disintegration alone.

Suggested Citation

  • Frank Strobel, 2001. "When to Leave a Monetary Union ?," Revue économique, Presses de Sciences-Po, vol. 52(2), pages 389-397.
    • Handle: RePEc:cai:recosp:reco_522_0389
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    Cited by:

    1. Strobel, Frank, 2005. "Monetary integration and inflation preferences: A real options analysis," European Economic Review, Elsevier, vol. 49(4), pages 845-860, May.
    2. Francesco Menoncin & Marco Tronzano, 2005. "Is a Monetary Union a Never-Ending Story?," Revue économique, Presses de Sciences-Po, vol. 56(1), pages 25-49.
    3. Frank Strobel, 2005. "Leaving EMU: a real options perspective," Applied Economics, Taylor & Francis Journals, vol. 37(13), pages 1449-1453.

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