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Currency areas and international assistance

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Author Info
PICARD, Pierre M.
WORRALL, Tim

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Abstract

This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.

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File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2007_52.pdf
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Publisher Info
Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007052.

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Date of creation: 01 Jul 2007
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Handle: RePEc:cor:louvco:2007052

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Related research
Keywords: monetary union; currency areas; fiscal federalism; limited commitment; mutual insurance;

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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  1. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Blackwell Publishing, vol. 55(4), pages 541-54, October. [Downloadable!] (restricted)
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This page was last updated on 2009-11-19.

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