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Monetary Union, Entry Conditions and Economic Reform

  • F. Gulcin Ozkan
  • Anne Sibert
  • Alan Sutherland

This paper models the behaviour of a potential entrant into a monetary union where there is an inflation entry condition. In addition to making a monetary policy decision during a qualifying period, the potential entrant must make a decision about structural reform. The paper shows that the entry condition can have two undesirable effects. First, it can lead to multiple equilibria because inflationary expectations acquire a self-fulfilling property. Second, the entry condition can lead to a reduction in the amount of reform. This is because the entry condition reduces inflationary expectations and thus reduces the incentive to reform.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 00-03.

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Handle: RePEc:kud:epruwp:00-03
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  1. Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, vol. 44(2), pages 339-364, April.
  2. Winkler, B, 1997. "Of Sticks and Carrots. Incentives and the Maastricht Road to EMU," Economics Working Papers eco97/02, European University Institute.
  3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  4. Willem H. Buiter, 1995. "Macroeconomic policy during a transition to monetary union," LSE Research Online Documents on Economics 20701, London School of Economics and Political Science, LSE Library.
  5. Anne Sibert, 1996. "Monetary Integration and Economic Convergence," Archive Working Papers 030, Birkbeck, Department of Economics, Mathematics & Statistics.
  6. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  7. De Grauwe, Paul, 1995. "Alternative strategies towards monetary union," European Economic Review, Elsevier, vol. 39(3-4), pages 483-491, April.
  8. Artis, Michael, 1996. "Alternative Transitions to EMU," Economic Journal, Royal Economic Society, vol. 106(437), pages 1005-15, July.
  9. De Grauwe, Paul, 1996. "Monetary union and convergence economics," European Economic Review, Elsevier, vol. 40(3-5), pages 1091-1101, April.
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