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Is a Monetary Union a Never-Ending Story?

  • Francesco Menoncin
  • Marco Tronzano

This paper extends the existing literature on the long-run sustainability of a monetary union using an optimal stopping framework. We assume that inflation is endogenous andmoney growth is the control variable. Under a particular condition on some parameters, the union goes on forever. Moreover, the effective breakdown of the union is governed by two critical thresholds (affected also by countries’ political weights): (i) a lower level for domestic inflation and (ii) an upper level for union’s inflation. The optimal time for leaving a monetary union is the first time either domestic inflation goes down the former threshold or union’s inflation goes over the latter threshold.

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Article provided by Presses de Sciences-Po in its journal Revue économique.

Volume (Year): 56 (2005)
Issue (Month): 1 ()
Pages: 25-49

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Handle: RePEc:cai:recosp:reco_561_0025
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