Currency areas and international assistance
AbstractThis 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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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007052.
Date of creation: 01 Jul 2007
Date of revision:
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monetary union; currency areas; fiscal federalism; limited commitment; mutual insurance;
Other versions of this item:
- Tim Worrall & Pierre M. Picard, 2007. "Currency Areas and International Assistance," Keele Economics Research Papers KERP 2007/01, Centre for Economic Research, Keele University.
- Tim Worrall & Pierre M Picard, 2009. "Currency Areas and International Assistance," 2009 Meeting Papers 903, Society for Economic Dynamics.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- 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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