Monetary Union, Entry Conditions and Economic Reform
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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- Buiter, Willem H., 1995.
"Macroeconomic Policy During a Transition to Monetary Union,"
CEPR Discussion Papers
1222, C.E.P.R. Discussion Papers.
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- Gulcin Ozkan & Alan Sutherland, "undated".
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96/11, Department of Economics, University of York.
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- Winkler, B, 1997. "Of Sticks and Carrots. Incentives and the Maastricht Road to EMU," Economics Working Papers eco97/02, European University Institute.
- De Grauwe, Paul, 1995. "Alternative strategies towards monetary union," European Economic Review, Elsevier, vol. 39(3-4), pages 483-491, April.
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- Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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