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Monetary union with voluntary participation

Author

Listed:
  • William Fuchs

    (Stanford University)

  • Francesco Lippi

    (Banca d'Italia)

Abstract

A Monetary Union is modeled as a technology that makes a surprise policy deviation impossible but 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 contrasts with the static nature of optimal policy when participation is exogenously assumed and implies that policy in the union is not exclusively guided by area-wide developments but does occasionally take account of member countries� national developments. Second we show that there might exist states of the world in which the union breaks apart, as occurred in some historical episodes. 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, 2004. "Monetary union with voluntary participation," Temi di discussione (Economic working papers) 512, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_512_04
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    Cited by:

    1. Lippi, Francesco & Fuchs, William, 2003. "Monetary Union with Voluntary Participation," CEPR Discussion Papers 4122, C.E.P.R. Discussion Papers.
    2. Castro, Rui & Koumtingué, Nelnan, 2014. "On the individual optimality of economic integration," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 115-135.
    3. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank.
    4. 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.
    5. 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.
    6. Dapontas Dimitrios, 2012. "Can Euro Zone Survive and Long Prosper?," Journal of Economics and Behavioral Studies, AMH International, vol. 4(2), pages 121-128.
    7. Dimitrios Dapontas, 2013. "Saving Euro by Dividing Europe in Multiple OCAs," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 9(2), pages 107-119, April.

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    More about this item

    Keywords

    monetary union; 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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