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Inflation Aversion and Exit Probabilities in the Monetary Unions

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  • Paolo Canofari

    (LUISS School of European Political Economy)

Abstract

The paper considers a monetary union composed of two representative countries characterized by different inflation aversions. The model derives Nash equilibria after a country-specific shock in which the countries have a costly option to abandon the common currency. The main results are that the higher the inflation aversion of the country affected by the shock, the lower its exit probability. The higher the inflation aversion in both countries, the lower the probability that the country not directly hit also abandons the monetary union (contagion).

Suggested Citation

  • Paolo Canofari, 2018. "Inflation Aversion and Exit Probabilities in the Monetary Unions," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 24(1), pages 17-24, February.
    • Handle: RePEc:kap:iaecre:v:24:y:2018:i:1:d:10.1007_s11294-018-9664-1
    DOI: 10.1007/s11294-018-9664-1
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises

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