When are Monetary Commitments Credible? Parallel Agreements and the Sustainability of Currency Unions

Abstract

This article investigates the conditions which make it costly for governments to renege on institutional commitments governing monetary policy. Focusing on one such type of commitment – monetary integration – we develop and test a hypothesis which suggests that the presence of parallel international agreements plays an important role in raising the costs of exit for states which might otherwise withdraw from a monetary union. While existing political economy work on credible commitments in the area of monetary policy has had a heavy focus on countries in the European Union, we broaden the inquiry, using quantitative and qualitative evidence from the numerous African countries which have participated in monetary unions over the last forty years. Our results provide strong support for the parallel agreements hypothesis.