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Unit of account, sovereign debt, and optimal currency area

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  • Toyofuku, Kenta

Abstract

This paper considers how the choice of a unit of account affects the formation of an optimal currency area (OCA). First, we show that forming a currency union internalizes the exchange rate risk and leads to smoothing of consumption levels. However, changing the unit of account of the inherited sovereign debt to a common currency may increase a country’s debt burden if a debtor country is more likely to face a trade deficit within the union. Therefore, the OCA is determined by this trade-off and the debtor country may be better off choosing not to enter the currency union when it faces a high inherited sovereign debt.

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  • Toyofuku, Kenta, 2021. "Unit of account, sovereign debt, and optimal currency area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:intfin:v:75:y:2021:i:c:s1042443121001529
    DOI: 10.1016/j.intfin.2021.101441
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    More about this item

    Keywords

    Optimal currency area; Unit of account; Sovereign debt; Bailout;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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