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A Stochastic Simulation Model of an Optimum Currency Area

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  • Michel Beine

    ()

  • FréDéric Docquier

    ()

Abstract

In this paper, we develop a two-country stochastic simulation model based on the theory of optimum currency areas, which studies the desirability of a monetary union. Extending the general equilibrium model of Ricci (1995), we introduce the intertemporal dimension, which allows to deal more accurately with labor mobility and shock dynamics. We analyse the importance of shocks asymmetries and investigate the role of labor mobility. Furthermore, we illustrate the influence of trade openness and the impact of a fiscal federalism system, assuming a specific transfer allocation rule based on the relative evolution of unemployment between the two countries. Copyright Kluwer Academic Publishers 1998

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File URL: http://hdl.handle.net/10.1023/A:1008216701051
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 9 (1998)
Issue (Month): 3 (July)
Pages: 229-257

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Handle: RePEc:kap:openec:v:9:y:1998:i:3:p:229-257

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: optimum currency area; international labor mobility; fiscal federalism;

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References

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  1. Jacques Mélitz, 1995. "A suggested reformulation of the theory of optimal currency areas," Open Economies Review, Springer, vol. 6(3), pages 281-298, July.
  2. Eichengreen, Barry, 1990. "Is Europe an Optimum Currency Area?," CEPR Discussion Papers 478, C.E.P.R. Discussion Papers.
  3. Beetsma, Roel & Bovenberg, A Lans, 1995. "Designing Fiscal and Monetary Institutions for a European Monetary Union," CEPR Discussion Papers 1303, C.E.P.R. Discussion Papers.
  4. Tamim Bayoumi, 1994. "A Formal Model of Optimum Currency Areas," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 537-554, December.
  5. Masson, Paul R & Taylor, Mark P, 1992. "Common Currency Areas and Currency Unions: An Analysis of the Issues," CEPR Discussion Papers 617, C.E.P.R. Discussion Papers.
  6. Sachs, Jeffrey & Sala-i-Martin, Xavier, 1992. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States," CEPR Discussion Papers 632, C.E.P.R. Discussion Papers.
  7. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
  8. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  9. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  10. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 173-241, January.
  11. Fatás, Antonio, 1997. "EMU: Countries or Regions? Lessons from the EMS Experience," CEPR Discussion Papers 1558, C.E.P.R. Discussion Papers.
  12. Melitz, Jacques, 1995. "The current impasse in research on optimum currency areas," European Economic Review, Elsevier, vol. 39(3-4), pages 492-500, April.
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Cited by:
  1. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
  2. Frey, Rainer, 2009. "The design of an asymmetric currency union with shock persistence and spillovers: Short-term versus medium-term," European Journal of Political Economy, Elsevier, vol. 25(1), pages 85-97, March.
  3. Zahir, Antia & Djoudad, Ramdane & St-Amant, Pierre, 1999. "Canada’s Exchange Rate Regime and North American Economic Integration: The Role of Risk-Sharing Mechanisms," Working Papers 99-17, Bank of Canada.

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