A Model of an Optimum Currency Area
Volume/Issue:
Volume 1997
Issue 076
Publication date: June 1997
ISBN: 9781451849837
$20.00
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Topics covered in this book
This title contains information about the following subjects.
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Exports and Imports , Inflation , Labor , Money and Monetary Policy , WP , exchange rate , single currency , deutsche mark , Optimum currency areas , cost-benefit analysis , exchange rate regimes , currency union , monetary integration , aggregate money endowment , net benefit , full employment , money balance , money-velocity shock , currency redistribution , constant returns to scale , open economy , inflation convergence , optimum currency area literature , endowment of country , aggregate money endowment of country , Monetary unions , Exchange rate flexibility , Currencies , Inflation , Labor mobility , Europe
Summary
This paper investigates the circumstances under which it is beneficial to participate in a currency area. A two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, correlation of monetary shocks, and benefits of a single currency. The effect of openness on the net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area. Countries do not necessarily agree on whether a given currency union should be created.
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