Nash Bargaining, Money Creation, and Currency Union

St´ephane Auray

Aur´elien Eyquem

G´erard Hamiache

and

Jean-Christophe Poutineau
This paper is an attempt to combine global macroeconomic objectives with
an explicit analysis of resource allocation efficiency. It determines how money creation must be shared between Monetary Union members, given national particularities in the monetary transmission mechanisms. In a two-country “New Open Macroeconomics” model, we outline the optimality of an unequal treatment of nations. To this end, the original Nash bargaining concept is modified to allow a differentiated treatment of countries. By favoring the more flexible country and relying on international money flows to provide liquidity to the more rigid nation, all Union members register efficiency gains which compensate an unfavorable intertemporal inflation activity arbitrage in the Union Central Bank objective.
Key Words: Monetary union; Nash bargaining; New open macroeconomics.
JEL Classification Numbers: E58, F33, F41, C72.