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Mundell Revisited: a Simple Approach to the Costs and Benefits of a Single Currency Area

  • Stephen Ching
  • Michael B. Devereux

The paper evaluates the costs and benefits of a single currency area within a unified framework. Conventionally, it is argued that a single currency area carries a welfare loss owing to the sacrifice of exchange rate adjustment in the presence of country-specific shocks. But in 1973 Mundell argued that a single currency area offers risk-sharing benefits when capital markets are limited in their ability to facilitate consumption insurance. The authors construct a simple model and compare a system of independent national currencies to a single currency area. The presence of country-specific shocks may either reduce or enhance the benefits of a single currency area, depending on the importance of exchange rate adjustment relative to risk-sharing. In a simple quantitative analysis, we find that either regime may dominate, although the utility differences between the two regimes are very small. Copyright Blackwell Publishing Ltd 2003.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 11 (2003)
Issue (Month): 4 (09)
Pages: 674-691

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Handle: RePEc:bla:reviec:v:11:y:2003:i:4:p:674-691
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  1. Barry Eichengreen, 1998. "Does Mercosur Need a Single Currency," NBER Working Papers 6821, National Bureau of Economic Research, Inc.
  2. Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000. "On Regional Monetary Arrangements For ASEAN," CEPR Discussion Papers 2411, C.E.P.R. Discussion Papers.
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