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Commitment and the Adoption of a Common Currency

  • Russell Cooper

    (Boston University)

  • Hubert Kempf

    (UniversitÈ Paris-I PanthÈon-Sorbonne, France)

In contrast to Mundell's inquiry on the optimality of currency areas, this article aims to understand under what circumstances a Pareto-dominant monetary union will be established. Using a multicountry overlapping generations model, we highlight gains from monetary union arising from reduced transactions costs and lower inflation. Despite these gains, countries acting independently will impose barriers to exchange through local currency restrictions, thereby creating transactions costs and providing an incentive for inflation. Therefore, the gains from monetary union are most likely to be lost without collective effort. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 1 (February)
Pages: 119-142

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:1:p:119-142
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  1. Russell W. Cooper & Hubert Kempf, 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12.
  2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  3. Russell Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," Boston University - Institute for Economic Development 99, Boston University, Institute for Economic Development.
  4. Chang Roberto, 1995. "Bargaining a Monetary Union," Journal of Economic Theory, Elsevier, vol. 66(1), pages 89-112, June.
  5. Canzoneri, Matthew B., 1989. "Adverse incentives in the taxation of foreigners," Journal of International Economics, Elsevier, vol. 27(3-4), pages 283-297, November.
  6. Sibert, Anne, 1992. "Government finance in a common currency area," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 567-578, December.
  7. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
  8. Matsuyama, Kiminori & Kiyotaki, Nobuhiro & Matsui, Akihiko, 1993. "Toward a Theory of International Currency," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 283-307, April.
  9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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