| Frank Strobel, University of Birmingham |
| When to Leave a Monetary Union: Now or Later? |
| Session: C-10-10 Tuesday 15 August 2000 by Strobel, Frank |
| 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 break-up 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 break-up alone. |
| Submitted paper full-text in .pdf |