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Monetary Union with Voluntary Participation -super-1

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  • William Fuchs
  • Francesco Lippi

Abstract

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.

Suggested Citation

  • William Fuchs & Francesco Lippi, 2006. "Monetary Union with Voluntary Participation -super-1," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 437-457.
  • Handle: RePEc:oup:restud:v:73:y:2006:i:2:p:437-457
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00382.x
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    Cited by:

    1. Castro, Rui & Koumtingué, Nelnan, 2014. "On the individual optimality of economic integration," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 115-135.
    2. William Fuchs & Vinicius Carrasco, 2008. "Dividing and Discarding A Procedure for Taking Decisions with Non-transferable Utility," 2008 Meeting Papers 315, Society for Economic Dynamics.
    3. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank.
    4. repec:eee:jetheo:v:169:y:2017:i:c:p:170-217 is not listed on IDEAS
    5. Luque, Jaime & Morelli, Massimo & Tavares, José, 2014. "A volatility-based theory of fiscal union desirability," Journal of Public Economics, Elsevier, vol. 112(C), pages 1-11.
    6. Fujiwara, Ippei & Kam, Timothy & Sunakawa, Takeki, 2015. "Sustainable international monetary policy cooperation," Globalization and Monetary Policy Institute Working Paper 234, Federal Reserve Bank of Dallas.
    7. Alvarez, Fernando & Dixit, Avinash, 2014. "A real options perspective on the future of the Euro," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 78-109.
    8. Josef Schroth, 2013. "Fiscal policy coordination in monetary unions," 2013 Meeting Papers 74, Society for Economic Dynamics.

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