Instability and trade in currency areas
AbstractWe present a model of a currency area in which labor markets of country members are isolated but there is trade among these countries. When a country experiences a negative (resp. positive) shock, inflation goes down (up). This causes two effects. On the one hand the real interest rate of this country increases (decreases). On the other hand the goods produced in this country become more (less) competitive. We show that the stability of the system depends on several factors, including a large competitive effect, how inflation expectations are formed and fiscal policy. In general, stability requires a trade-off between the rationality of expectations and budget balance.
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/319.
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Other versions of this item:
- Alberto Alonso & Luis C. Corchon & Vanesa Guzman, 2004. "Instability And Trade In Currency Areas," Economics Working Papers we043010, Universidad Carlos III, Departamento de Economía.
- Corchón, Luis C. & Alonso, Alberto & Guzmán, Vanesa, . "Instability and Trade in Currency Areas," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3800, Universidad Carlos III de Madrid.
- F15 - International Economics - - Trade - - - Economic Integration
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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- Tobin, James, 1975.
"Keynesian Models of Recession and Depression,"
American Economic Review,
American Economic Association, vol. 65(2), pages 195-202, May.
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