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Regime switches under policy uncertainty in monetary unions

Listed author(s):
  • Canofari Paolo
  • Di Bartolomeo Giovanni

This paper analyzes the effects of policy uncertainty on the stability of a monetary union. Focusing on peripheral countries, we study how uncertainty over the consequences of a possible exit affects regime switches. Applying game theory and a cost-benefit analysis, we model a regime switch as the endogenous result of a two-stage policy game. We find that the effects of uncertainty are not trivial. Unilateral exits are less probable, but contagion is more likely to be observed. Our results are driven by two opposite forces: a traditional conservative effect induced by policy uncertainty in a single policymaker framework, which calls for more stability, and a strategic effect arising from the strategic interaction, which may undermine the monetary union’s foundation and strengthen incentives for contagion.

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File URL: http://wp.comunite.it/data/wp_no_126_2016.pdf
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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 00126.

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Date of creation: Nov 2016
Handle: RePEc:ter:wpaper:00126
Contact details of provider: Web page: http://wp.comunite.it/

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