Working Paper: CEPR ID: DP2116
Authors: Roel M.W.J. Beetsma; Henrik Jensen
Abstract: We explore endogenous monetary unification in the context of amodel in which a country with serious structural distortions (and, hence,high inflation) is admitted into a monetary union once its economicstructure has converged sufficiently towards that of the existingparticipants. If unification is reversible, so that the new entrant canalways be forced to leave the union again later, convergence stops for awhile after the high inflation country has joined. With irreversibleunification, temporary divergence occurs, and unification is most likely tobe delayed.
Keywords: monetary unification; structural distortions; inflation; convergence
JEL Codes: E61; E63; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reversible monetary unification (F36) | sustained reform efforts (E69) |
| irreversible monetary unification (F36) | less incentivized to implement reforms (E69) |
| high-inflation country (E31) | temporary divergence in structural distortions post-unification (F12) |
| low-inflation country (E31) | acceptance of high-inflation country into the union (F36) |
| structural distortions (F12) | incentives for reform (E69) |
| inflation levels (E31) | incentives for reform (E69) |