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Optimal Payment Areas or Optimal Currency Areas?

Author

Listed:
  • Patrick Bolton
  • Haizhou Huang

Abstract

We use the Optimal Capital Structure of Nations framework in Bolton and Huang (2018) to develop a new theory of Optimum Currency Areas. Whether two economically integrated nations should form an optimal currency area depends on a trade-off between financial flexibility (the value of monetary sovereignty) and monetary discipline (the commitment not to engage in competitive monetizations). We show that a monetary union works best when combined with a fiscal union and fiscal transfers. We also show that debt monetization is still desirable in a monetary union when both member-countries simultaneously face a negative output shock.

Suggested Citation

  • Patrick Bolton & Haizhou Huang, 2018. "Optimal Payment Areas or Optimal Currency Areas?," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 505-508, May.
    • Handle: RePEc:aea:apandp:v:108:y:2018:p:505-08
    Note: DOI: 10.1257/pandp.20181058
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    Citations

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    Cited by:

    1. Toyofuku, Kenta, 2021. "Unit of account, sovereign debt, and optimal currency area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    2. Patrick Bolton, 2020. "The Poverty of Monetarism," Journal of Applied Corporate Finance, Morgan Stanley, vol. 32(4), pages 49-67, December.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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