The Political Economy of Currency Unions

Download or read book The Political Economy of Currency Unions written by Kai Arvai and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: How can monetary and fiscal policy sustain a currency union when member states have an exit option? This paper derives an interest rate rule that features state-dependent country weights with which the central bank can prevent a break-up. A simulation of a calibrated model reveals that this policy rule lacks firepower and can only extend the lifetime of the union for a while. This result is robust in most versions of the union, as even a primitive fiscal union with lump-sum transfers is better suited to prevent a break-up than monetary policy. Different calibrations also demonstrate that more open member states bear a larger burden if policies are targeted towards countries that want to leave.