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Monetary Union with Voluntary Participation -super-1

  • William Fuchs
  • Francesco Lippi

A monetary union is modelled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we show that such an arrangement may dominate a regime with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, the optimal plan is shown to respond to a country's temptation to leave the union by tilting both current and future policy in its favour. This yields a non-linear rule according to which each country weight in policy decisions is time-varying and depends on its incentive to abandon the union. Second, we show that there might be conditions such that a break-up of the union, as has occurred in some historical episodes, is efficient. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability, and disruption of a monetary union. Copyright 2006, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00382.x
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 73 (2006)
Issue (Month): 2 ()
Pages: 437-457

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Handle: RePEc:oup:restud:v:73:y:2006:i:2:p:437-457
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