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The Impact of Common Currencies on Financial Markets: A Literature Review and Evidence from the Euro Area

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Liliane Karlinger

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Paper provided by Bank of Canada in its series Working Papers with number 02-35.

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Length: 48 pages Abstract: This paper reviews both the theoretical and empirical literature on the impact of common currencies on financial markets and evaluates the first three years of experience with Economic and Monetary Union (EMU). If we assume that multiple currencies prevent national financial markets from integrating, a currency union can improve welfare by (i) encouraging international risk diversion through private portfolio diversification, and (ii) improving growth performance by allowing for riskier, higher-quality, more long-run investment. EMU has encouraged integration among the still fairly fragmented European financial markets both directly and indirectly. When applying the European experience to a potential North American monetary union, one should consider that the U.S. and Canadian financial markets are already more integrated than the European ones, and thus the potential gains in terms of greater financial market integration from a common currency in North America may be more moderate than in Europe.
Date of creation: 2002
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Handle: RePEc:bca:bocawp:02-35

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Keywords: Exchange rate regimes; Financial markets;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stefano Schiavo, 2005. "Financial integration, GDP correlation and the endogeneity of optimum currency areas," Working Papers 25, Università di Verona, Dipartimento di Scienze economiche. [Downloadable!]
    Other versions:
  2. Philipp Paulus, 2004. "The fiscal stability impact of monetary unions - looking beneath the Stability Pact debate," Otto-Wolff-Institut Discussion Paper Series 05/2004, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland. [Downloadable!]
  3. Kwanho Shin & Yunjong Wang, 2003. "Trade Integration and Business Cycle Synchronization in East Asia," ISER Discussion Paper 0574, Institute of Social and Economic Research, Osaka University. [Downloadable!]
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