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Article
When to Leave a Monetary Union?
Revue économique (2001)
  • Frank Strobel, University of Birmingham
Abstract

Using a two-country model of monetary union where policymakers minimize the continuous-time equivalent of a Barro-Gordon-type loss function, we examine the value of the option of monetary disintegration when the national preference parameters associated with an inflationary surprise follow correlated geometric Brownian motions. We derive the critical level of the ratio of these parameters that triggers a move to monetary disintegration and find that a country will be willing to return to monetary independence only if the other country's relative inflation preferences are strictly, and potentially substantially, greater than a benchmark value depending on the cost of monetary disintegration alone.

Keywords
  • monetary disintegration,
  • inflation bias,
  • real option
Disciplines
Publication Date
2001
Citation Information
Frank Strobel. "When to Leave a Monetary Union?" Revue économique Vol. 52 Iss. 2 (2001)
Available at: http://works.bepress.com/frank_strobel/16/