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On the Inflationary Bias of Common Currencies: the Latin Union Puzzle

Abstract : The prospect of imminent monetary unification in Europe has directed attention to the importance of the institutional setting that would be appropriate for efficient management of a common currency. The supporters of a ‘EuroFed’ often use a popular argument that stresses the superiority of a central bank as compared to a regime where sovereign countries can print a common currency [see e.g. Emerson (1992, p. 35)]. It is said that in the latter case, there is an incentive for each country to ‘free-ride’ by ‘over-issuing’ the common currency. since while the cost of inflation is shared, the benefit of seigniorage accrues to the country that prints the money. The problem was first formalized by Casella and Feinstein (1989) in a two-country model. They concluded that - due to ‘pervasive free-rider problems’ - the success of a common currency depends crucially on the organization of a jointly controlled central bank (...).
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  • HAL Id : hal-03416221, version 1
  • SCIENCESPO : 2441/665

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Marc Flandreau. On the Inflationary Bias of Common Currencies: the Latin Union Puzzle. European Economic Review, Elsevier, 1993, 37 (2-3), pp.501 - 506. ⟨hal-03416221⟩

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