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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 Department of Economics, University of York in its series Discussion Papers with number 97/15.

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Handle: RePEc:yor:yorken:97/15
Contact details of provider: Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
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  1. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  2. Buiter, Willem H., 1995. "Macroeconomic Policy During a Transition to Monetary Union," CEPR Discussion Papers 1222, C.E.P.R. Discussion Papers.
  3. De Grauwe, Paul, 1996. "Monetary union and convergence economics," European Economic Review, Elsevier, vol. 40(3-5), pages 1091-1101, April.
  4. Winkler, B, 1997. "Of Sticks and Carrots. Incentives and the Maastricht Road to EMU," Economics Working Papers eco97/02, European University Institute.
  5. De Grauwe, Paul, 1995. "Alternative strategies towards monetary union," European Economic Review, Elsevier, vol. 39(3-4), pages 483-491, April.
  6. Anne Sibert, 1996. "Monetary Integration and Economic Convergence," Archive Working Papers 030, Birkbeck, Department of Economics, Mathematics & Statistics.
  7. Artis, Michael, 1996. "Alternative Transitions to EMU," Economic Journal, Royal Economic Society, vol. 106(437), pages 1005-15, July.
  8. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  9. 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.
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