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On the benefits of a monetary union: Does it pay to be bigger?

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  • Forlati, Chiara

Abstract

This paper revisits the question of the appropriate domain of a currency area using a New-Keynesian open economy model in which the world is split into two areas, each framed as a continuum of small open regions. We show that the adoption of a common currency like the euro can be beneficial for the members of the monetary union, since the spill-over effects generated by the inflationary policies of the small open economies are likely to outweigh the costs of not tailoring monetary policy to country-specific shocks. We also show that while the enlargement of the monetary union to another group of small open economies can bring about welfare gains for all countries involved, monetary integration of two large economies, such as the euro area and the U.S., will not. These findings can help to rationalize the process of the creation and enlargement of multi-country currency areas like the eurozone.

Suggested Citation

  • Forlati, Chiara, 2015. "On the benefits of a monetary union: Does it pay to be bigger?," Journal of International Economics, Elsevier, vol. 97(2), pages 448-463.
  • Handle: RePEc:eee:inecon:v:97:y:2015:i:2:p:448-463
    DOI: 10.1016/j.jinteco.2015.07.001
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    Cited by:

    1. Hettig, Thomas & M�ller, Gernot, 2017. "Fiscal policy coordination in currency unions at the effective lower bound," CEPR Discussion Papers 11780, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    New Keynesian open economy macroeconomics; Optimal monetary policy; Currency area; Terms-of-trade externality;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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