TY  - JOUR
AU  - Cooper,Russell
AU  - Kempf,Hubert
TI  - Establishing a Monetary Union
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6791
PY  - 1998
Y2  - November 1998
UR  - http://www.nber.org/papers/w6791
L1  - http://www.nber.org/papers/w6791.pdf
N1  - Author contact info:
Russell Cooper
Department of Economics
The Pennsylvania State University
611 Kern
State College, PA 16802
E-Mail: russellcoop@gmail.com

Hubert Kempf
Ecole Normale Superieure, Cachan,
and Paris School of Economics
E-Mail: kempf@univ-paris1.fr
AB  - 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.
ER  -