Monetary union expansion: The role of market power in trade

This paper examines the feasibility of a monetary union expansion which is desirable for both the entering country and the existing union members. The paper concentrates on the fact that the outside country is likely to be small relative to the existing monetary union, and lack the resistance to inflation which comes with market power in trade. Consideration of this market power effect allows for mutually-desirable entry if the outside nation central bank is moderately more averse to inflation than the central bank of the existing monetary union.