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Is a Monetary Union a Never-Ending Story?

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  • Francesco Menoncin
  • Marco Tronzano

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 andmoney 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? political weights): (i) a lower level for domestic inflation and (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.

Suggested Citation

  • Francesco Menoncin & Marco Tronzano, 2005. "Is a Monetary Union a Never-Ending Story?," Revue économique, Presses de Sciences-Po, vol. 56(1), pages 25-49.
    • Handle: RePEc:cai:recosp:reco_561_0025
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    References listed on IDEAS

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