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Optimal currency areas and customs unions: are they connected?

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Marion Kohler

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Abstract

This paper examines the link between currency areas and customs unions. The size of a bloc of countries practising some form of co-ordination of monetary policy is limited by the incentive to free-ride that formation of the bloc creates. However, when the threat of a trade war is introduced, the stable size of the bloc increases. This suggests that a large currency area is more likely to emerge where it combines with acustoms union, and that the stability of both currency area and customs union are closely related, because the threat of tariff penalties can enforce co-operation.

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Paper provided by Bank of England in its series Bank of England working papers with number 89.

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Handle: RePEc:boe:boeewp:89

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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. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August. [Downloadable!] (restricted)
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  2. Casella, Alessandra, 1992. "Participation in a Currency Union," American Economic Review, American Economic Association, vol. 82(4), pages 847-63, September. [Downloadable!] (restricted)
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  3. Jeffrey A Frankel, 1993. "Is there a Currency Bloc in the Pacific?," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia. [Downloadable!]
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  4. Buiter, Willem H & Corsetti, Giancarlo & Pesenti, Paolo, 1995. "A Centre-Periphery Model of Monetary Coordination and Exchange Rate Crises," CEPR Discussion Papers 1201, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August. [Downloadable!] (restricted)
  6. Basevi, Giorgio & Denicolo, Vincenzo & Delbono, Flavio, 1990. "International monetary cooperation under tariff threats," Journal of International Economics, Elsevier, vol. 28(1-2), pages 1-23, February. [Downloadable!] (restricted)
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  7. Williamson, John, 1982. "A survey of the literature on the optimal peg," Journal of Development Economics, Elsevier, vol. 11(1), pages 39-61, August. [Downloadable!] (restricted)
  8. Claude, et al d'Aspremont, 1983. "On the Stability of Collusive Price Leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 17-25, February. [Downloadable!] (restricted)
  9. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August. [Downloadable!] (restricted)
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  10. Kohler, M, 1996. "Coalitions in International Monetary Policy Games," Economics Working Papers eco96/07, European University Institute.
  11. Canzoneri, Matthew B. & Henderson, Dale W., 1988. "Is sovereign policymaking bad?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 93-140, January. [Downloadable!] (restricted)
  12. Canzoneri, Matthew B & Gray, Jo Anna, 1985. "Monetary Policy Games and the Consequences of Non-cooperative Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 547-64, October. [Downloadable!] (restricted)
  13. Rodrik, Dani, 1995. "Political economy of trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 28, pages 1457-1494 Elsevier. [Downloadable!] (restricted)
  14. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787.
  15. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November. [Downloadable!] (restricted)
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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. William C. Gruben & Mark A. Wynne & Carlos E.J.M. Zarazaga, 2001. "Dollarization and monetary unions: implementation guidelines," Center for Latin America Working Papers 0201, Federal Reserve Bank of Dallas. [Downloadable!]
  2. Lamberte, Mario B. & Milo, Melanie S. & Pontines, Victor, 2001. "NO to ¥E$? Enhancing Economic Integration in East Asia through Closer Monetary Cooperation," Discussion Papers DP 2001-16, Philippine Institute for Development Studies. [Downloadable!]
  3. Marion Kohler, . "Coalition formation in international monetary policy games," Bank of England working papers 92, Bank of England. [Downloadable!]
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This page was last updated on 2009-11-27.

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