Strategic Interactions and Contagion Effects under Monetary Unions

This paper applies game theory and a cost-benefit analysis to study voluntary exits and contagion effects in countries joined to a monetary union. The paper looks at two non-core or periphery countries of a large union and examines the role of structural asymmetries and strategic interactions as determinants of equilibrium outcomes, following both country-specific and common shocks. The paper finds that under almost symmetry between countries, country-specific shocks are never associated with multiple equilibria and, if large enough, can spread to other countries leading to contagion. By contrast, common shocks are seen to sustain multiple equilibria if almost-symmetric countries are considered and to have implications similar to those found in the country-specific case if large structural asymmetries are admitted.