The theory of optimum currency areas, trade adjustment, and trade
AbstractThis article seeks to provide a closer integration of the theory of optimum currency areas with the theory of international trade. A currency area is treated as a continuous variable ranging from zero to one: zero if there is no enlargement, and some positive value otherwise, corresponding exactly to the percentge of trade in the enlarged area. The benefits of widening a currency area are then regarded, in terms of conventional trade theory, as equivalent to a reduction in transportation cost. The costs of widening a currency area are seen, instead, with reference to open economy macroeconomics, as a drop in the speed of adjustment of the terms of trade to their long-run equilibrium level. On this basis, it is shown that the marginal benefits of enlarging a currency area fall, the marginal costs rise, and an optimum size arises. But this size depends heavily on the optimal composition of the members. Copyright Kluwer Academic Publishers 1996
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Bibliographic InfoArticle provided by Springer in its journal Open Economies Review.
Volume (Year): 7 (1996)
Issue (Month): 2 (April)
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Web page: http://www.springerlink.com/link.asp?id=100323
optimum currency areas; exchange rate regime; trade adjustment; international trade;
Other versions of this item:
- Mélitz, Jacques, 1993. "The Theory of Optimum Currency Areas, Trade Adjustment and Trade," CEPR Discussion Papers 847, C.E.P.R. Discussion Papers.
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- F15 - International Economics - - Trade - - - Economic Integration
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
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