Seigniorage, Delegation and Common Currency: Why Monetary Unions May Fail?
We provide a parable that can explain why monetary unions have historically been dissolved following political separation. Using a simple model of government finance in a common currency area, it is shown that delegation to an "inflationary" central banker is an optimal policy when countries struggle for seigniorage revenues, whether delegates coordinate monetary policy or not. Furthermore, a common central bank, in which representatives coordinate monetary policy, will reach an outcome that is Pareto-inferior to that produced by a non-cooperative seigniorage war. Accordingly, without political dialogue regarding the designation of the representatives, a monetary union can fail. Copyright 2002 by Kluwer Academic Publishers
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