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Monetary Union with Voluntary Participation


  • Fuchs, William
  • Lippi, Francesco


A monetary union is modelled as a technology that makes surprise devaluations impossible but requires voluntarily participating countries to follow the same monetary policy. It is shown that for low discount factors and sufficiently correlated shocks welfare in the union is higher than that achievable when countries coordinate while retaining their own independent policy. Optimal policy, when participation in the union is voluntary, is characterized and shown to respond to agents’ incentives to leave by tilting current and future policy in their favour. This contrasts with the static nature of optimal policy when participation is exogenously assumed. This finding implies that policy in the union will not be exclusively guided by area-wide developments but will occasionally take account of member countries’ national developments. Finally, we show that there might exist states of the world in which the union breaks apart, as occurred in several historical episodes. The Paper thus provides a first formal analysis of the forces behind the formation, sustainability and disruption of a monetary union.

Suggested Citation

  • Fuchs, William & Lippi, Francesco, 2003. "Monetary Union with Voluntary Participation," CEPR Discussion Papers 4122, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4122

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    References listed on IDEAS

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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. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank.
    3. 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.
    4. Fuchs, William & Lippi, Francesco, 2003. "Monetary Union with Voluntary Participation," CEPR Discussion Papers 4122, C.E.P.R. Discussion Papers.
    5. Sauro Mocetti, 2012. "Educational choices and the selection process: before and after compulsory schooling," Education Economics, Taylor & Francis Journals, vol. 20(2), pages 189-209, February.

    More about this item


    cross-country spillovers; limited commitment; monetary union;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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