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Currency Bloc Formation As a Dynamic Process Basedon Trade Network Externalities

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  • Etienne B. Yehoue
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    Abstract

    The recent experience of the European Economic and Monetary Union (EMU) has stimulated the debate over currency union and reinforced the incentive for the emergence of currency blocs in other regions of the world. This paper builds a dynamic stochastic model-based on network externalities operating through trade channels-to explain the emergence of currency blocs, and specifically, why some countries join a currency union earlier than others. The paper develops and formalizes the intuition that currency bloc formation is path dependent, and that countries join currency blocs sooner the more they trade with the bloc member countries, with each additional member serving in a dynamic way to attract more members into the bloc. Evidence from the current pattern of EMU expansion supports the model, which is later used to elaborate on the pattern of further expansion of the union.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/222.

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    Length: 35
    Date of creation: 01 Nov 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/222

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    Related research

    Keywords: Trade relations; Economic models; equation; intermediate goods; probability; average trade; network externalities; monetary union; equations; trade flows; international trade; trade volume; trade share; trading costs; correlation; trade blocs; trade bloc; bilateral trade; trade channels; pattern of trade; trading partners; free trade; monetary unions; volume of trade; trade pattern; transactions costs; probabilities; trading blocs; world economy; trade partner; imperfect competition; markov process; constant variance; bloc trade; trading partner; optimization; rate of change; political economy; statistics; trade values; foreign trade; oil-producing countries; tradable goods; imported goods; trade structure; intermediate inputs; value of imports; time series; price stability; trade barriers; low trade; stochastic model; optimum currency areas; open economy;

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    References

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    1. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
    2. Flandreau, Marc, 1995. "An Essay on the Emergence of the International Gold Standard, 1870-80," CEPR Discussion Papers 1210, C.E.P.R. Discussion Papers.
    3. Konishi, Hideo & Ray, Debraj, 2003. "Coalition formation as a dynamic process," Journal of Economic Theory, Elsevier, vol. 110(1), pages 1-41, May.
    4. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
    5. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
    6. Bogomolnaia, Anna & Jackson, Matthew O., 2002. "The Stability of Hedonic Coalition Structures," Games and Economic Behavior, Elsevier, vol. 38(2), pages 201-230, February.
    7. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
    8. Dixit, Avinash, 2000. "A Repeated Game Model of Monetary Union," Economic Journal, Royal Economic Society, vol. 110(466), pages 759-80, October.
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    Cited by:
    1. Nienke Oomes & Christopher M. Meissner, 2008. "Why Do Countries Peg the Way they Peg? the Determinants of Anchor Currency Choice," IMF Working Papers 08/132, International Monetary Fund.

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