Abstract: This article examines stability of a three-country model which comprises a monetary union with two “ins” (i.e. members) and an “out” (i.e. non-member). This stability issue was examined by McAvinchey and McCausland who considered a hypothetical enlargement of Eurozone with a new member country, and empirically showed that the effects of enlargement are “predominantly destabilizing”. Using the Argy's method of exact log-linearization, we show that the model is intrinsically unstable. A numerical example is given with the 2010 parameter values. We found that the stability could ironically be rehabilitated when uncovered interest parity and purchasing power parity are violated.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Business and International Management
- Political Science and International Relations