This paper extends the existing literature on the long-run sustainability of a monetary union using an optimal stopping framework. We assume that inflation is endogenous and money growth is the control variable. Under a particular condition on some parameters, the union goes on forever. Moreover, the effective breakdown of the union is governed by two critical thresholds (affected also by countries’s political weights): (i) a lower level for domestic inflation; (ii) an upper level for union’s inflation. The optimal time for leaving a monetary union is the first time either domestic inflation goes down the former threshold or union’s inflation goes over the latter threshold.
Is a Monetary Union a Never-Ending Story?
TRONZANO, MARCO ROBERTO;
2005-01-01
Abstract
This paper extends the existing literature on the long-run sustainability of a monetary union using an optimal stopping framework. We assume that inflation is endogenous and money growth is the control variable. Under a particular condition on some parameters, the union goes on forever. Moreover, the effective breakdown of the union is governed by two critical thresholds (affected also by countries’s political weights): (i) a lower level for domestic inflation; (ii) an upper level for union’s inflation. The optimal time for leaving a monetary union is the first time either domestic inflation goes down the former threshold or union’s inflation goes over the latter threshold.
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