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This paper quantitatively analyzes the stability and breakup of nations. The tradeoff between increasing returns in the provision of public goods and the costs of greater cultural heterogeneity mediates agents' preferences over different geographical configurations, thus determining the likelihood of secessions and unions. After calibrating the model to Europe, we identify the regions prone to secession and the countries most likely to merge. We then estimate the implied monetary gains from EU membership. As a test of the theory, we show that the model can account for the breakup of Yugoslavia and the dynamics of its disintegration. We find that economic differences between the Yugoslav republics determined the order of disintegration, but cultural differences, though small, were key to the country's instability. The paper also provides empirical support for the use of genetic distances as a proxy for cultural heterogeneity. [ABSTRACT FROM AUTHOR]

We study in this paper pairwise convergence of aggregate output dynamics by applying a known exact, finite-sample, most powerful and invariant (MPI) test statistic in a new analytical, conditional inverted beta setup. Besides being useful for finding interval estimates of a persistence parameter when needed, it turns out that our IB-MPI test has a comparable power to discriminate near-unit roots. By using standard, time-series definitions of divergence, incomplete or complete catching-up, and long-run convergence, the empirical application of the test shows that pairwise differences in per capita income levels between European countries overwhelmingly follow a trend-stationary, incomplete catching-up process. [ABSTRACT FROM AUTHOR]

This paper focuses on the requirements and features of a successful monetary union on the basis of the optimum currency area theory, the “logical roadmap” for integration as proposed by Balassa as well as the economic and institutional framework of the European Economic and Monetary Union (EMU). The analysis suggests that monetary union is contingent upon high economic integration and strong political commitment. However, political union is not an ex-ante requirement. Outside factors such as systemic shocks and globalization seem to speed up the pooling of sovereignty in the economic domain. A firm commitment to stability-oriented monetary and fiscal policies is a precondition for gaining credibility and trust within and outside a monetary union. Last, but not least, convergence criteria, fiscal rules and strong institutions are necessary to help ensure and monitor the participants’ compliance. However, the European experience is not a blueprint for regional integration that can be directly and entirely applied to other regions. [ABSTRACT FROM AUTHOR]