Working Paper: CEPR ID: DP1561
Authors: Anne Sibert
Abstract: 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.
Keywords: policy coordination; economic integration; monetary union
JEL Codes: E61; F33; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncoordinated monetary policy (E61) | excessive inflation (E31) |
| Monetary union (F36) | greater economic reform (P19) |
| Monetary union (F36) | lower inflation (E31) |
| No monetary union (F36) | lower reform levels and higher inflation (E31) |
| Coordination (P11) | lower welfare (I38) |