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Collective Pegging to an External Currency: Lessons from a Three-Country Model

Author

Listed:
  • Bangaké, Chrysost

    () (Orleans University)

  • Desquilbet, Jean-Baptiste

    () (Artois University)

Abstract

This paper examines the circumstances under which it is beneficial for small countries in a currency union to peg their currency to a large one (euro zone for example). For these purposes, we provide a three-country theoretical model extending the two-country model by Ricci (2008). The theoretical model is based on a Ricardian model of free traded, with specialised economies each producing one traded and one-traded good. We show that when the home country belongs to a monetary union and its exchange rate is anchored to the large country, the stability of its economy depends on the variability of real and monetary shocks for the large country. Furthermore, if the monetary rule in the currency union is higher than the average rate of growth of money supply of large country or if it is difficult to find a monerary rule in the currency union, it is advantageous to anchor the single currency to that of the large country.

Suggested Citation

  • Bangaké, Chrysost & Desquilbet, Jean-Baptiste, 2010. "Collective Pegging to an External Currency: Lessons from a Three-Country Model," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 550-570.
  • Handle: RePEc:ris:integr:0515
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    More about this item

    Keywords

    Optimum Currency Area; Currency Union; Cost-Benefit Analysis; Collective Pegging; Small Countries; ECOWAS;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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