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Optimal currency areas and customs unions: are they connected?

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  • Marion Kohler

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.

Suggested Citation

  • Marion Kohler, 1998. "Optimal currency areas and customs unions: are they connected?," Bank of England working papers 89, Bank of England.
    • Handle: RePEc:boe:boeewp:89
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1998/wp89.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Kohler, Marion, 2002. "Coalition formation in international monetary policy games," Journal of International Economics, Elsevier, vol. 56(2), pages 371-385, March.
    3. William C. Gruben & Mark A. Wynne & Carlos E. Zarazaga, 2001. "Dollarization and monetary unions: implementation guidelines," Center for Latin America Working Papers 0201, Federal Reserve Bank of Dallas.

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