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Coalition formation in international monetary policy games
Authors:Marion Kohler
Institution:Bank of England, Threadneedle Street, London EC2R 8AH, UK
Abstract:This paper analyses coalition formation in monetary policy coordination games between n countries. We show that some but not all countries may join if the decision to be a member of the coalition is incentive-compatible for the individual country. Positive spillovers of the coalition formation process and the resulting free-rider problem limit the stable coalition size: since the coalition members are bound by the union’s discipline, an outsider can successfully export inflation without fearing that the insiders will try to do the same. These ‘gains from staying out’ arise even in the case of symmetric shocks.
Keywords:Currency unions  International policy coordination  Free-riding  Coalition formation
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