IDEAS home Printed from https://ideas.repec.org/a/ier/iecrev/v44y2003i1p119-142.html
   My bibliography  Save this article

Commitment and the Adoption of a Common Currency

Author

Listed:
  • Russell Cooper

    (Boston University)

  • Hubert Kempf

    (UniversitÈ Paris-I PanthÈon-Sorbonne, France)

Abstract

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

Suggested Citation

  • Russell Cooper & Hubert Kempf, 2003. "Commitment and the Adoption of a Common Currency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 119-142, February.
    • Handle: RePEc:ier:iecrev:v:44:y:2003:i:1:p:119-142
    as

    Download full text from publisher

    File URL: http://openurl.ingenta.com/content?genre=article&issn=0020-6598&volume=44&spage=119
    Download Restriction: Free access to full text is restricted to Ingenta subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Canzoneri, Matthew B., 1989. "Adverse incentives in the taxation of foreigners," Journal of International Economics, Elsevier, vol. 27(3-4), pages 283-297, November.
    2. Chang Roberto, 1995. "Bargaining a Monetary Union," Journal of Economic Theory, Elsevier, vol. 66(1), pages 89-112, June.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    4. 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.
    5. Russell Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," Econometric Society World Congress 2000 Contributed Papers 0529, Econometric Society.
    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. Kiminori Matsuyama & Nobuhiro Kiyotaki & Akihiko Matsui, 1993. "Toward a Theory of International Currency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(2), pages 283-307.
    8. Robert P. Inman & Daniel L. Rubinfeld, 1997. "Rethinking Federalism," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 43-64, Fall.
    9. Russell W. Cooper & Hubert Kempf, 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 25(Sum), pages 3-12.
    10. 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 473-491, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Quadrini, Vincenzo & de Francisco, Eva & Azzimonti, Marina, 2012. "Financial Globalization, Inequality, and the Raising of Public Debt," CEPR Discussion Papers 8893, C.E.P.R. Discussion Papers.
    2. Régis Breton & Mariana Rojas Breu & Vincent Bignon, 2013. "Monetary Union, Banks and Financial Integration," Post-Print hal-01685888, HAL.
    3. Timur Hulagu & Devrim Ikizler, 2010. "Effects of Monetary Unions on Inequalities (Para Birliklerinin Esitsizlikler Uzerindeki Etkileri)," Working Papers 1014, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    4. Wojtek PaczosBy, 2020. "Optimal inflation, monetary integration, and asymmetric sticky prices," Oxford Economic Papers, Oxford University Press, vol. 72(3), pages 710-730.
    5. David M. Arseneau, 2004. "Optimal inflation in an open economy with imperfect competition," Finance and Economics Discussion Series 2004-25, Board of Governors of the Federal Reserve System (U.S.).
    6. Bignon, V. & Breton, R. & Rojas Breu, M., 2013. "Currency Union with and without Banking Union," Working papers 450, Banque de France.
    7. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(1), pages 81-112, January.
    8. Arellano, Cristina & Heathcote, Jonathan, 2010. "Dollarization and financial integration," Journal of Economic Theory, Elsevier, vol. 145(3), pages 944-973, May.
    9. Evans, Richard W., 2012. "Is openness inflationary? Policy commitment and imperfect competition," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1095-1110.
    10. Yiting Li & Akihiko Matsui, 2005. "A Theory of International Currency and Seigniorage Competition," CIRJE F-Series CIRJE-F-363, CIRJE, Faculty of Economics, University of Tokyo.
    11. Russell Cooper & Hubert Kempf, 2004. "Overturning Mundell: Fiscal Policy in a Monetary Union," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 371-396.
    12. Yiting Li & Akihiko Matsui, 2005. "A Theory of International Currency and Seigniorage Competition," CARF F-Series CARF-F-041, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    13. David Arseneau, 2007. "The Inflation Tax in an Open Economy with Imperfect Competition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 126-147, January.
    14. Richard W. Evans, 2007. "Is openness inflationary? Imperfect competition and monetary market power," Globalization Institute Working Papers 01, Federal Reserve Bank of Dallas.
    15. Hubert KEMPF, 2006. "The Constitutional Treaty of the EU and the institutional framework," Departmental Working Papers 2006-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    16. Schäfer, Benjamin, 2016. "Monetary union with sticky prices and direct spillover channels," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 99-118.
    17. David M. Arseneau, 2004. "Optimal Inflation in an Open Economy," Econometric Society 2004 North American Summer Meetings 279, Econometric Society.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers 2005-1, Copenhagen Business School, Department of Finance.
    2. Russell Cooper & Hubert Kempf, 1998. "Establishing a Monetary Union," NBER Working Papers 6791, National Bureau of Economic Research, Inc.
    3. Luisa Lambertini & Paul Levine & Joseph Pearlman, 2007. "Fiscal Policy in a Monetary Union: Can Fiscal Cooperation be Counterproductive?," School of Economics Discussion Papers 1707, School of Economics, University of Surrey.
    4. Christoph Moser & Axel Dreher, 2010. "Do Markets Care about Central Bank Governor Changes? Evidence from Emerging Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1589-1612, December.
    5. Ramon Moreno, 2001. "Pegging and stabilization policy in developing countries," Economic Review, Federal Reserve Bank of San Francisco, pages 17-29.
    6. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(1), pages 81-112, January.
    7. Pedro Gomis-Porqueras & Timothy Kam & Christopher Waller, 2017. "Nominal Exchange Rate Determinacy under the Threat of Currency Counterfeiting," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(2), pages 256-273, April.
    8. Markus Knell, 2002. "Wage Formation in Open Economies and the Role of Monetary and Wage-Setting Institutions," Working Papers 63, Oesterreichische Nationalbank (Austrian Central Bank).
    9. Eijffinger, S.C.W. & Goderis, B., 2002. "Financial crises, monetary policy and financial fragility : A second-generation model of currency crises," Other publications TiSEM d2ccad44-44f6-40d8-9be0-1, Tilburg University, School of Economics and Management.
    10. Obstfeld, Maurice, 1997. "Destabilizing effects of exchange-rate escape clauses," Journal of International Economics, Elsevier, vol. 43(1-2), pages 61-77, August.
    11. Mihov, Ilian & Sibert, Anne, 2006. "Credibility and Flexibility with Independent Monetary Policy Committees," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 23-46, February.
    12. Ovalle, Raul & Ramírez, Francisco A., 2014. "Reglas versus Discreción en la Política Fiscal: Introducción al caso Dominicano [Rules vs Discretion in Fiscal Policy: An Introduction to the Case of the Dominican Republic]," MPRA Paper 68332, University Library of Munich, Germany.
    13. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
    14. Makris, Miltiadis, 2006. "Capital tax competition under a common currency," Journal of Urban Economics, Elsevier, vol. 59(1), pages 54-74, January.
    15. Eaton, Jonathan, 1985. "Optimal and time consistent exchange-rate management in an overlapping-generations economy," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 83-100, March.
    16. Russell Cooper & Hubert Kempf, 2004. "Overturning Mundell: Fiscal Policy in a Monetary Union," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 371-396.
    17. Sibert, Anne & Mihov, Ilian, 2002. "Credibility and Flexibility with Monetary Policy Committees," CEPR Discussion Papers 3278, C.E.P.R. Discussion Papers.
    18. Canale, Rosaria Rita, 2002. "Equilibrium exchange rate theories under flexible exchange rate regimes," MPRA Paper 3086, University Library of Munich, Germany.
    19. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
    20. Benigno, Pierpaolo & Schilling, Linda M. & Uhlig, Harald, 2022. "Cryptocurrencies, currency competition, and the impossible trinity," Journal of International Economics, Elsevier, vol. 136(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ier:iecrev:v:44:y:2003:i:1:p:119-142. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley-Blackwell Digital Licensing or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/deupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.