Implementation of the European Monetary Union and Its Sustainability, 1999-2002

Implementation of the European Monetary Union and Its Sustainability, 1999-2002: Recommendations from a Dynamic Game

This paper presents a dynamic theoretic model of monetary union break-downs that result from violations of the macroeconomic targets agreed upon at the time of monetary integration. Non-cooperative behavior of two constituencies or interest groups results in multiple possible equilibria. The paper analyzes the conditions of financing and the cost of maintaining the targets that will determine whether or not a monetary union member will be subject to foreign reserves depletion or, in the extreme, an exchange rate attack. In addition, it provides the decision rule for European countries to determine if they should continue to participate in the monetary union or withdraw from it. Therefore, it indirectly provides an intuition for the conditions required for the monetary union to succeed. (JEL Classifications: F31)