Monetary union as a regional public good, impacts on social cohesion and governability in UNASUR

Abstract

This paper develops a theoretical model of the determination of regional public goods (RPG) provision at the national level, based on the assumption that the objective of governments is to win the next election. Using a monetary union as particular case of a RPG, we show that in the absence of coordination mechanisms (institutions), the Nash equilibrium predicts suboptimal provision because countries lack incentives to internalize into their decisions any RPG’s spillovers. A Grimm Trigger strategy may arise, however, if the countries can develop a gradually commitment technology a la Maastricht, leading to an optimal provision of RPG with boosting consequences in terms of governability. Nevertheless, low levels of social cohesion (high heterogeneity) may compromise the success of the agreement forcing the introduction of a between jurisdiction trnasfer schemes to save tne monetary union.