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Monetary Union Viability: A Criterion Proposal
Author(s) -
Alonso Alberto,
Guzmán Vanesa
Publication year - 2014
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12059
Subject(s) - economics , inflation (cosmology) , monetary economics , market liquidity , monetary policy , liquidity trap , debt , interest rate , macroeconomics , international economics , liquidity risk , physics , theoretical physics
We propose a model that represents the dynamic behaviour of a monetary union comprising two countries whose natural interest rates are initially unequal. This initial disparity and the subsequent application of a common monetary policy generate different national inflation rates and lead to losses of competitiveness, foreign deficits, and the indebtedness of one country with respect to the other. We propose as a viability criterion for the modelled monetary union a combination of non‐explosive foreign debt and the ability of the central bank to neutralize the contracting effects of taking on additional debt to avoid falling into a liquidity trap.