This paper analyzes the effects of policy uncertainty on the stability of a monetary union. Focusing on peripheral countries, we study how uncertainty over the consequences of a possible exit affects regime switches. Applying game theory and a cost-benefit analysis, we model a regime switch as the endogenous result of a two-stage policy game. We find that the effects of uncertainty are not trivial. Unilateral exits are less probable, but contagion is more likely to be observed. Our results are driven by two opposite forces: a traditional conservative effect induced by policy uncertainty in a single policymaker framework, which calls for more stability, and a strategic effect, arising from the strategic interaction, which may undermine the monetary union's foundation and strengthen incentives for contagion.

Regime switches under policy uncertainty in monetary unions / Canofari, Paolo; DI Bartolomeo, Giovanni. - In: EUROPEAN JOURNAL OF POLITICAL ECONOMY. - ISSN 0176-2680. - 47:(2017), pp. 124-132. [10.1016/j.ejpoleco.2016.08.007]

Regime switches under policy uncertainty in monetary unions

Canofari Paolo
Membro del Collaboration Group
;
2017

Abstract

This paper analyzes the effects of policy uncertainty on the stability of a monetary union. Focusing on peripheral countries, we study how uncertainty over the consequences of a possible exit affects regime switches. Applying game theory and a cost-benefit analysis, we model a regime switch as the endogenous result of a two-stage policy game. We find that the effects of uncertainty are not trivial. Unilateral exits are less probable, but contagion is more likely to be observed. Our results are driven by two opposite forces: a traditional conservative effect induced by policy uncertainty in a single policymaker framework, which calls for more stability, and a strategic effect, arising from the strategic interaction, which may undermine the monetary union's foundation and strengthen incentives for contagion.
Common currency; Contagion; Currency crisis; Multiplicative uncertainty; Policy game; Economics and Econometrics; Political Science and International Relations
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/181627
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