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Central bank flexibility and the drawbacks to currency unification

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  • Geoffrey M.B. Tootell

Abstract

Recently, the benefits to monetary unification have been widely heralded. Advocates of European, as well as East and West German, monetary integration point repeatedly to the advantages the United States derives from possessing a single currency. Yet, the losses resulting from this policy have too often been ignored. ; This article briefly reviews the costs and benefits of currency integration as articulated in the traditional optimal currency area literature. For the first time a full-employment model is used to examine the cost to currency unification derived from diversity among countries’ distaste for unemployment and inflation. Furthermore, arguments for European monetary integration that highlight the benefits gained by the U.S. currency area are shown to be misleading; not only does the United States suffer significant losses because of its unified currency, but the magnitudes of these costs and benefits will differ between the United States and Europe. Finally, U.S. monetary policy is examined in light of the optimal currency area analysis.

Suggested Citation

  • Geoffrey M.B. Tootell, 1990. "Central bank flexibility and the drawbacks to currency unification," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-18.
  • Handle: RePEc:fip:fedbne:y:1990:i:may:p:3-18
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    File URL: http://www.bostonfed.org/economic/neer/neer1990/neer390a.pdf
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    Citations

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    Cited by:

    1. Geoffrey M. B. Tootell, 1991. "Regional economic conditions and the FOMC votes of district presidents," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 3-16.
    2. Richard W. Kopcke, 1999. "Currency boards: once and future monetary regimes?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 21-37.
    3. Alexandra Ferreira-Lopes & Álvaro Pina, 2011. "Business Cycles, Core, and Periphery in Monetary Unions: Comparing Europe and North America," Open Economies Review, Springer, vol. 22(4), pages 565-592, September.
    4. Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2012. "Business Cycles Association in a Small Monetary Union: The Case of Switzerland," Spatial Economic Analysis, Taylor & Francis Journals, vol. 7(1), pages 9-30, March.
    5. Jose Ripoll, 2003. "National Appointments to Multinational Monetary Policy Making: A Role Conflict?," Macroeconomics 0301009, EconWPA.
    6. Wynne, Mark A. & Koo, Jahyeong, 1997. "Business cycles under monetary union: EU and US business cycles compared," Working Papers 9707, Federal Reserve Bank of Dallas.

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