Monetary integration and the role of money finance

This dissertation presents three self-contained theoretical essays which each investigate potential roles for money-finance in a monetary union. The motivation for this research is the emerging monetary union in Europe as put forward by the 1991 Treaty of Maastricht. Although theoretical in nature, each is tailored to consider specific issues which have concerned European policy makers in the structuring of the economic and monetary union.;In the second essay, the structure and operation of the monetary union are considered from an intertemporal public finance perspective. An immediate implication of a single currency area is the interdependence of public finance decisions. This interdependence may be exploited for purposes of reducing uninsurable public expenditure risk and may serve to motivate participation in a monetary union. This extends the ideas put forward in the previous essay into a more general framework. An immediate benefit of this more general framework is the ability to calibrate welfare gains from participation in a monetary union. For the three largest members of the European Community, positive welfare gains are available from participation as long as intertemporal behaviour is not restricted.;The final essay investigates the need for fiscal policy coordination in a monetary union. In an environment with real externalities associated with fiscal policies, the essay demonstrates that the inefficiencies associated with non-coordinated fiscal policies may be offset by the central monetary authority. The potential for this depends upon the strategic behaviour of the authority: as a Nash player, the authority is unable to effect an efficient outcome; as a Stackelberg leader, the authority is able to effect any efficient outcome. This suggests that the European economic and monetary union may operate successfully without explicit coordination of fiscal policies.;The first essay considers the positive theory of monetary integration in a general equilibrium monetary model of the world economy. The analysis demonstrates that, in the face of uncertainty and incomplete asset markets, participation in a monetary union may be welfare improving since it facilitates state-dependent resource transfers between regional economies. Such resource transfers are used optimally to reduce the variance of consumption for risk averse agents. This potential for improving welfare depends not only on the agents' risk aversion but on the interrelationship of the regional economies: contrary to Mundell (1961), economically diverse regions may be well suited to a common currency.