Currency Areas, Policy Domains, and the Institutionalization of Fixed Exchange Rates
AbstractEmerging-market countries are being urged to choose between freely floating exchange rates and firmly fixed rates supported by strong institutional arrangementsûcurrency boards, monetary unions, or formal dollarization. This paper assesses the benefits and costs of institutionalizing fixed rates by synthesizing and supplementing the theory of optimum currency areas (OCA theory). It shows that (1) OCA theory and related empirical work have been excessively influenced by the special case used originally by Robert Mundell, where exogenous shocks display mirror-image asymmetry; (2) OCA theory ignores a vital difference between the domains of monetary policy under a monetary union and other institutional arrangements; (3) because it neglects the way in which a monetary union reduces the debt-creating effects of fiscal stabilizers, OCA theory understates the strength of the case for combining a monetary union with a fiscal federation. The paper also criticizes recent work by Jeffrey Frankel and Andrew Rose in which they claim to show that monetary union reduces asymmetric shocks and thus makes monetary union less costly. The paper suggests that their results may reflect the effects of monetary union on the transmission of shocks rather than their incidence.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0467.
Date of creation: Aug 2000
Date of revision:
Contact details of provider:
Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
Monetary unions; exchange rate regimes; policy domains;
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.:
- Honohan, Patrick & Lane, Philip R, 1999.
"Pegging to the Dollar and the Euro,"
Wiley Blackwell, vol. 2(3), pages 379-410, November.
- John F. Helliwell & Ross McKitrick, 1998.
"Comparing Capital Mobility Across Provincial and National Borders,"
NBER Working Papers
6624, National Bureau of Economic Research, Inc.
- John F. Helliwell & Ross McKitrick, 1999. "Comparing Capital Mobility Across Provincial and National Borders," Canadian Journal of Economics, Canadian Economics Association, vol. 32(5), pages 1164-1173, November.
- Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
- Stephen Nickell & Luca Nunziata, 2000. "Employment Patterns in OECD Countries," CEP Discussion Papers dp0448, Centre for Economic Performance, LSE.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.