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Instability and trade in currency areas


  • Alonso, Alberto
  • Corchon, Luis C.
  • Guzman, Vanesa


We 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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  • Alonso, Alberto & Corchon, Luis C. & Guzman, Vanesa, 2007. "Instability and trade in currency areas," Economics Letters, Elsevier, vol. 94(1), pages 71-75, January.
  • Handle: RePEc:eee:ecolet:v:94:y:2007:i:1:p:71-75

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    References listed on IDEAS

    1. 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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    JEL classification:

    • 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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