DP1561 Monetary Integration and Economic Convergence

Author(s): Anne Sibert
Publication Date: January 1997
Keyword(s): Economic Integration, Montetary Union, Policy Coordination
JEL(s): E61, F33, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1561

Recent research in contract theory views ownership as a substitute for complete contracts. In this paper this approach is applied to monetary integration. Countries face a coordination problem when conducting monetary policy: negative spillovers ensure uncoordinated policy generates too high inflation. Ex ante, policy-makers can undertake politically costly economic reform. This has a positive spillover because it improves the outcome of the monetary policy game. Ex post, contracting over policy may be possible, however, it is supposed that ex-ante contracting over reform and monetary policy, is not. This paper analyses when monetary union is a good substitute for this inability to commit.