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Should Small Countries Join an Existing Monetary Union ?

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  • M. von Furstenberg, George

    ()
    (Fordham University)

  • P. Teolis, David

    (General Motors Corporation)

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    Abstract

    We explore the welfare consequences of the alternative monetary and exchangerate regimes still available to the small country in open international financial markets in view of the optimum monetary policy that the large country adopts for itself. Both economies are based on nominal wage contracts with employment determined by the demand for labor under the contract terms. Reacting to movement in contemporaneously observable price variables, the monetary authorities of the large country, and of the small country under floating, aim to keep labor on its supply curve in the face of IS and LM shocks to aggregate demand, and shocks to aggregate supply. With monetary union, the small country trades discretionary monetary policy for greater stability in real exchange rates and insulation from its own idiosyncratic money supply and demand disturbances. The relative welfare costs of the different regimes for the small country are modeled and deduced from researched parameter values. The result is that there can be a stabilization rationale for accession to a monetary union except at low values of the correlations of like types of shocks for the large and small country.

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    Bibliographic Info

    Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

    Volume (Year): 17 (2002)
    Issue (Month): ()
    Pages: 104-132

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    Handle: RePEc:ris:integr:0187

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    Web page: http://econo.sejong.ac.kr/
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    Related research

    Keywords: Monetary Union; Floating Exchange Rates; Accession Countries;

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    Cited by:
    1. Alexandra Ferreira Lopes, 2007. "The Costs of EMU for Transition Countries," Money Macro and Finance (MMF) Research Group Conference 2006 2, Money Macro and Finance Research Group.
    2. Roberta Capello & Ugo Fratesi, 2010. "Globalization and a dual Europe: future alternative growth trajectories," The Annals of Regional Science, Springer, vol. 45(3), pages 633-665, December.

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