DP471 | External Economies and European Integration: The Potential for Self-fulfilling Expectations

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It is often suggested that "European economic and monetary integration is important because people think it is". This paper is an exploratory attempt to formalize this idea. As the basis for our investigation, we rely on recent analysis by Krugman (1989) and Matsuyama (1989), which addresses the process of equilibrium determination in a stylized economy in which more than one equilibrium is possible. As an additional dimension, we also address potential implications for unemployment using the unemployment hysteresis model of Blanchard and Summers (1986).