Coalition Formation in International Monetary Policy Games

Bank of England Working Paper No. 92

67 Pages Posted: 6 May 1999

See all articles by Marion Kohler

Marion Kohler

Bank for International Settlements (BIS)

Date Written: February 1999

Abstract

It is well known from the analysis of monetary policy coordination of two countries that coordination often Pareto-dominates the outcome of the non-cooperative game. Hence both countries will have an incentive to form a union when it is certain that the other country will also join.

However, in an n-country model, free-riding incentives restrict the size of a stable coalition to less then n countries. 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.

The formation of a large currency bloc is not sustainable since it would impose too much discipline on all participants. However, the co-existence of several smaller currency blocs may be a second-best solution to the free-riding problem of monetary policy coordination.

JEL Classification: E52, E58, E61

Suggested Citation

Kohler, Marion, Coalition Formation in International Monetary Policy Games (February 1999). Bank of England Working Paper No. 92, Available at SSRN: https://ssrn.com/abstract=150149 or http://dx.doi.org/10.2139/ssrn.150149

Marion Kohler (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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