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Coalition formation in international monetary policy games

  • Kohler, Marion

It is well known from the analysis of monetary policy co-ordination of two countries that co-ordination often Pareto-dominates the outcome of the non-co-operative game. Hence both countries will have an incentive to form a union when it is certain that the other country will also join. However, in an n-country model, free-riding incentives restrict the size of a stable coalition to less then n countries. Since the coalition members are bound by the union's discipline, an outsider can successfully export inflation without fearing that the insiders will try to do the same. The formation of a large currency bloc is not sustainable since it would impose too much discipline on all participants. However, the co-existence of several smaller currency blocs may be a second-best solution to the free-riding problem of monetary policy co-ordination.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 56 (2002)
Issue (Month): 2 (March)
Pages: 371-385

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Handle: RePEc:eee:inecon:v:56:y:2002:i:2:p:371-385
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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