NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Establishing a Monetary Union

Russell Cooper, Hubert Kempf

NBER Working Paper No. 6791
Issued in November 1998
NBER Program(s):   EFG

This paper explores the gains to monetary union. We consider a two-country overlapping generations model. Agents work when young and have random tastes over the composition (domestic vs. foreign goods) of old age consumption. In equilibrium, governments require that local currency be used for transactions as a means of creating a base for seignorage. Thus agents hold multiple currencies to deal with uncertainty in their optimal consumption bundles. We argue that this equilibrium is Pareto dominated by a monetary union, in which there is a single currency and a strong central bank that optimally chooses zero inflation. As suggested by the European Commission's 1990 report, monetary union reduces the inefficiencies created by multiple currencies and leads to price stability. Finally, we argue this Pareto superior outcome cannot be achieved without cooperation of the two governments.

download in pdf format
   (1108 K)

email paper

This paper is available as PDF (1108 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6791

Published: Cooper, Russel and Hubert Kempf. "Establishing a Monetary Union." International Economic Review 44 (2003): 119-142.

Users who downloaded this paper also downloaded these:
Cooper and Kempf w7607 Designing Stabilization Policy in a Monetary Union
Eaton and Tamura w5457 Japanese and U.S. Exports and Investment as Conduits of Growth
Eaton and Kortum w6253 Technology and Bilateral Trade
Eaton, Gutierrez, and Kortum w6827 European Technology Policy
Berman, Bound, and Machin w6166 Implications of Skill-Biased Technological Change: International Evidence
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us