Fighting Inflation in Politically Unstable Regions: Assessing the effects of regional monetary integration
High inflation stagnates economic performance in politically unstable countries. In this study we look into causal mechanisms affecting the commitment of governments to long-run inflationary policies. In specific, we are interested in the potential effects of regional monetary integration on the optimization strategy by national governments. By using a theoretical analytical approach we found that an increase in output due to economic integration does not alter the optimal policy from cooperative to reneging or vise versa. It does, however, amplifies the payoff of following either strategy, making the government more anchored in their original strategy choice. If monetary integration has a moderating effect on the tendency to create inflation, it is more likely to be through norm-setting rather than through a change in incentives. Keywords: Inflationary Policies; Political Monetary Cycle; Political Economy; Monetary Integration; Time-Inconsistency.
Faculteit der Managementwetenschappen