Is a Monetary Union a Never-Ending Story?∗

This paper extends the existing literature on the long-run sustainabil-ity of a monetary union using an optimal stopping framework. We assume that inflation is endogenous and money growth is the control variable. Un-der a particular condition on some parameters, the union goes on forever. Moreover, the effective breakdown of the union is governed by two critical thresholds: (i) a lower level for domestic inflation and (ii) an upper level for union’s inflation. The optimal time for leaving a monetary union is the first time either domestic inflation goes down the former threshold or union’s inflation goes over the latter threshold. JEL classification: E42, C61