Seigniorage,Delegation and Common Currency: Why Monetary Unions May Fail?

We provide a parable that can explain why monetary unions havehistorically been dissolved following political separation.Using a simple model of government finance in a commoncurrency area, it is shown that delegation to an``inflationary'' central banker is an optimal policy whencountries struggle for seigniorage revenues, whether delegatescoordinate monetary policy or not. Furthermore, a commoncentral bank, in which representatives coordinate monetarypolicy, will reach an outcome that is Pareto-inferior to thatproduced by a non-cooperative seigniorage war. Accordingly,without political dialogue regarding the designation of therepresentatives, a monetary union can fail.