Coordination and Crisis in Monetary Unions

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Coordination and Crisis in Monetary Unions

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Title: Coordination and Crisis in Monetary Unions
Author: Aguiar, Mark; Amador, Manuel; Farhi, Emmanuel; Gopinath, Gita

Note: Order does not necessarily reflect citation order of authors.

Citation: Aguiar, Mark, Manuel Amador, Emmanuel Farhi, and Gita Gopinath. "Coordination and Crisis in Monetary Unions." NBER Working Paper No. 20277. doi: 10.3386/w20277
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Abstract: We characterize fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment.  We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
Published Version: doi:10.3386/w20277
Other Sources: http://scholar.harvard.edu/files/gopinath/files/monetary_union_sep8_2013.pdf
http://scholar.harvard.edu/files/farhi/files/coord_crisis_mu.pdf
http://conference.nber.org/confer/2013/SDf13/summary.html
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:12661035
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