The importance of excluded countries of monetary integration in Europe

In contrast to the traditional analysis, this paper analyses the costs implied by the exclusion rather than by the inclusion of a country to the European Monetary Union (EMU). In a three-country model, we show that the monetary policy of the excluded country will be more expansionist and more counter-cyclical than the monetary policy of the EMU countries. This resembles a strategy of competitive depreciation. The country whose shocks are most symmetric to those of the excluded country suffers most from this exclusion, through an increase in the variance of its production. We also examine the proposals to deal with the relations between EMU and non EMU countries of the EU.