Globalization, the Output-Inflation Tradeoff and Inflation

Under which conditions is it advantageous for countries to form a single payments area? This question is analyzed in a model of spatial bank competition to understand better the economic foundations of the Single Euro Payments Area (SEPA). An economic research perspective on the mostly informal policy debates about SEPA is developed. The analysis suggests that expectations about the positive effects of SEPA may be exaggerated as most channels for enhancing public welfare seem rather weak. Still the project may be worthwhile undertaking if the cost of creating SEPA-compliant systems is reduced by extending the time frame for the implementation phase and if the use of electronic payments is promoted.