Title
Analysis of a monetary union enlargement in the framework of linear-quadratic differential games Analysis of a monetary union enlargement in the framework of linear-quadratic differential games
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Berlin ,
Subject
Economics
Source (journal)
International economics and economic policy. - Berlin
Volume/pages
6(2009) :2 , p. 135-156
ISSN
1612-4804
vabb
c:vabb:288046
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
This paper studies the effects of a monetary union enlargement using the techniques and outcomes from an extensive research project on macroeconomic policy coordination in the EMU. Our approach is characterized by two main pillars: (i) linear-quadratic differential games to capture externalities, spillovers and strategic behaviour of (fiscal and monetary) players; and (ii) endogenous coalition formation concepts which enable us to study a creation and stability of different cooperation arrangements. In this paper we focus on the first pillar and construct a multi-player linear-quadratic continuous-time model of 5 countries and 4 central banks to evaluate effects of accession of a new member to an existing MU. Our findings stress the importance of an asymmetric shock confirming basic results of the OCA theory. It comes out that in our setting it is never profitable to enlarge the monetary union when there is a risk of an asymmetric shock. What is more, the potential losses from accession are so high that it can be barely possible to design a transfer system to compensate for a worse situation of some countries.
E-info
https://repository.uantwerpen.be/docman/iruaauth/ae2f95/e70f23ec939.pdf
Handle