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Monetary Union with Voluntary Participation

Author

Listed:
  • William Fuchs

    () (Stanford University)

  • Francesco Lippi

    () (Bank of Italy and CEPR)

Abstract

A Monetary Union is modeled 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 identify conditions under which such arrangement may dominate a coordinated system with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, optimal policy is shown to respond to the agents’ incentives to leave the union by tilting both current and future policy in their favor. This yields a non-linear rule according to which each country’s weight in policy decisions is time-varying and depends on the incentives to abandon the union. Second we show that there might conditions such that a break-up of the union, as 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.

Suggested Citation

  • William Fuchs & Francesco Lippi, 2005. "Monetary Union with Voluntary Participation," Discussion Papers 04-013, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:04-013
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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

    Keywords

    monetary union; cross-country spillovers; limited commitment;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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