DP1720 Monetary Union, Entry Conditions and Economic Reform

Author(s):	F Gulcin Ozkan, Anne Sibert, Alan Sutherland
Publication Date:	November 1997
Keyword(s):	Convergence, Entry conditions, Monetary Union
JEL(s):	F33, F36
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1720

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.