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Monetary union or else?

By H. Haller and Y. Ioannides

Abstract

We analyze a strategic game where in a first step, a country can adopt another country''s currency. In a second step, thee two countries commit resources to economic integration. A common currency reduces the overall resource costs of economic integration, but imposes an idiosyncratic adjustment cost on the country changing its currency. A country''s currency choice depends on how, favorably or adversely, it expects the other country to respond to a currency change. We find that economic integration without a common currency is a subgame perfect equilibrium outcome. Economic integration with a common currency is another, superior subgame perfect equilibrium outcome

Topics: HG Finance
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 1995
OAI identifier: oai:eprints.lse.ac.uk:20757
Provided by: LSE Research Online
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