FREE-RIDING, CONVERGENCE AND 2-SPEED MONETARY UNIFICATION IN EUROPE

This paper shows that two-speed monetary unification carries a danger. Low-inflation countries in Europe have an interest in delaying entry of the high-inflation country because it would raise the average infla tion rate. However, this country might refuse to join, when the first group find it qualified to, that is when convergence has taken place. This is because the high-inflation country can employ its monetary pol icy to stabilize against shocks given that the currency union members have optimally chosen a lower inflation rate. Hence, a tradeoff exists between the necessity for convergence and the free-rider problem.