Coordination and Crisis in Monetary Unions

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Aguiar, Mark, Manuel Amador, Emmanuel Farhi and Gita Gopinath (2015): “Coordination and Crisis in Monetary Unions,” The Quarterly Journal of Economics, 130(4): 1727-1779.


We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to overborrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.

BibTeX Cite:

	author = {Aguiar, Mark and Amador, Manuel and Farhi, Emmanuel and Gopinath, Gita},
	title = {Coordination and Crisis in Monetary Unions},
	volume = {130},
	number = {4},
	pages = {1727-1779},
	year = {2015},
	doi = {10.1093/qje/qjv022},
	URL = {},
	journal = {The Quarterly Journal of Economics}