Joining European Monetary Union: A Real Options Perspective

We examine the real option implicit in countries' decisions on whether to join a monetary union when future benefits of this move are uncertain. Our theoretical model is calibrated for the current Euro-12 area and EU-15 outs, proxying policymakers' inflation preferences with unemployment rates, debt-to-GDP and potential-to-actual-GDP ratios. The Euro-12 area is generally ready or close to wanting to expand, whereas the EU-15 outs are unready to make that move at present and have widely varying probabilities of wanting to do so in the future, depending on the measure used.