Strategic Interactions and Contagion Effects Under Monetary Unions

12 Pages Posted: 15 Oct 2015

See all articles by Paolo Canofari

Paolo Canofari

LUISS SCHOOL OF EUROPEAN POLITICAL ECONOMY; University of Teramo; University of Rome Tor Vergata - Department of Economics and Law

Giovanni Di Bartolomeo

Sapienza University of Rome, Department of Economics and Law

Giovanni Piersanti

University of Rome Tor Vergata - Department of Economics and Law

Date Written: October 2015

Abstract

This paper applies game theory and a cost‐benefit analysis to study voluntary exits and contagion effects in countries joined to a monetary union. The paper looks at two non‐core or periphery countries of a large union and examines the role of structural asymmetries and strategic interactions as determinants of equilibrium outcomes, following both country‐specific and common shocks. The paper finds that under almost symmetry between countries, country‐specific shocks are never associated with multiple equilibria and, if large enough, can spread to other countries leading to contagion. By contrast, common shocks are seen to sustain multiple equilibria if almost‐symmetric countries are considered and to have implications similar to those found in the country‐specific case if large structural asymmetries are admitted.

Suggested Citation

Canofari, Paolo and Di Bartolomeo, Giovanni and Piersanti, Giovanni, Strategic Interactions and Contagion Effects Under Monetary Unions (October 2015). The World Economy, Vol. 38, Issue 10, pp. 1618-1629, 2015. Available at SSRN: https://ssrn.com/abstract=2674403 or http://dx.doi.org/10.1111/twec.12281

Paolo Canofari (Contact Author)

LUISS SCHOOL OF EUROPEAN POLITICAL ECONOMY ( email )

VIA DI VILLA EMILIANI 14
ROME, Roma 00198
Italy

University of Teramo ( email )

Campus Coste S. Agostino
Via R. Balzarini 1, Località Colleparco
Teramo, TE 64100
Italy

University of Rome Tor Vergata - Department of Economics and Law ( email )

Rome, I-00133
Italy

Giovanni Di Bartolomeo

Sapienza University of Rome, Department of Economics and Law ( email )

via Castro del Laurenziano 9
Roma, 00191
Italy

Giovanni Piersanti

University of Rome Tor Vergata - Department of Economics and Law ( email )

Via Columbia n.2
I-00133 Rome
Italy

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