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Commitment and the Adoption of a Common Currency

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  • Russell Cooper

    (Boston University)

  • Hubert Kempf

    (UniversitÈ Paris-I PanthÈon-Sorbonne, France)

Abstract

In contrast to Mundell's inquiry on the optimality of currency areas, this article aims to understand under what circumstances a Pareto-dominant monetary union will be established. Using a multicountry overlapping generations model, we highlight gains from monetary union arising from reduced transactions costs and lower inflation. Despite these gains, countries acting independently will impose barriers to exchange through local currency restrictions, thereby creating transactions costs and providing an incentive for inflation. Therefore, the gains from monetary union are most likely to be lost without collective effort. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 1 (February)
Pages: 119-142

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:1:p:119-142

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  1. Sibert, Anne, 1992. "Government finance in a common currency area," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 567-578, December.
  2. Russell W. Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," NBER Working Papers 7607, National Bureau of Economic Research, Inc.
  3. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
  4. Roberto Chang, 1994. "Bargaining a monetary union," Working Paper 94-4, Federal Reserve Bank of Atlanta.
  5. Russell W. Cooper & Hubert Kempf., 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12.
  6. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  7. Canzoneri, Matthew B., 1989. "Adverse incentives in the taxation of foreigners," Journal of International Economics, Elsevier, vol. 27(3-4), pages 283-297, November.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Cited by:
  1. Richard W. Evans, 2007. "Is openness inflationary? Imperfect competition and monetary market power," Globalization and Monetary Policy Institute Working Paper 01, Federal Reserve Bank of Dallas.
  2. Jonathan Heathcote & Cristina Arellano, 2004. "Dollarization and Financial Integration," 2004 Meeting Papers 10, Society for Economic Dynamics.
  3. David Arseneau, 2007. "The Inflation Tax in an Open Economy with Imperfect Competition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 126-147, January.
  4. David M. Arseneau, 2004. "Expectation traps in a New Keynesian open economy model," Finance and Economics Discussion Series 2004-45, Board of Governors of the Federal Reserve System (U.S.).
  5. Marina Azzimonti & Eva de Francisco & Vincenzo Quadrini, 2012. "Financial globalization, inequality, and the raising of public debt," Working Papers 12-6, Federal Reserve Bank of Philadelphia.
  6. David M. Arseneau, 2004. "Optimal inflation in an open economy with imperfect competition," Finance and Economics Discussion Series 2004-25, Board of Governors of the Federal Reserve System (U.S.).
  7. Yiting Li & Akihiko Matsui, 2005. "A Theory of International Currency and Seigniorage Competition," CARF F-Series CARF-F-041, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  8. Hubert KEMPF, 2006. "The Constitutional Treaty of the EU and the institutional framework," Departmental Working Papers 2006-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  9. Timur Hulagu & Devrim Ikizler, 2010. "Effects of Monetary Unions on Inequalities (Para Birliklerinin Esitsizlikler Uzerindeki Etkileri)," Working Papers 1014, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  10. Richard W. Evans, 2012. "Is Openness Inflationary? Policy Commitment and Imperfect Competition," BYU Macroeconomics and Computational Laboratory Working Paper Series 2012-06, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
  11. David M. Arseneau, 2004. "Optimal Inflation in an Open Economy," Econometric Society 2004 North American Summer Meetings 279, Econometric Society.

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