Monetary Union, Real Exchange Rate, and Welfare
This paper considers the effects of formation or new accession to a monetary union (MU) on itself (“ins”) and the outsiders (“outs”) as well. Since a MU inherently means a “large” entity, we construct a large country model to examine those effects in the context of economic growth. The closed-form solution of the terms of trade enables us to derive the plausible conclusions: (a) the terms of trade of the MU improves, (b) the real income of “outs” falls, implying a real transfer to the MU, and (c) the real exchange rate of the MU currency appreciates
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