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A Model of an Optimum Currency Area

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  • Ricci, Luca Antonio

Abstract

This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, and transactions costs. The effect of openness on the net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area. Also, prospective member countries do not necessarily agree on whether a given currency union should be created.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2008-8
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File URL: https://econstor.eu/bitstream/10419/18021/1/economics_2008-8.pdf
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Article provided by Kiel Institute for the World Economy (IfW) in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): ()
Pages: 1-31

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Handle: RePEc:zbw:ifweej:7125
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Keywords: Optimum currency areas; cost- benefit analysis; exchange rate regimes; currency union; monetary integration;

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Find related papers by JEL classification:
  • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
  • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • 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
  • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
  • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
  • F02 - International Economics - - General - - - International Economic Order and Integration
  • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
  • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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  1. Luca Ricci, 2006. "Uncertainty, Flexible Exchange Rates, and Agglomeration," Open Economies Review, Springer, vol. 17(2), pages 197-219, April.
  2. Ruby Randall & Jorge Shepherd & Frits Van Beek & J. R. Rosales & Mayra Rebecca Zermeno, 2000. "The Eastern Caribbean Currency Union; Institutions, Performance, and Policy Issues," IMF Occasional Papers 195, International Monetary Fund.
  3. Furceri, Davide & Karras, Georgios, 2006. "Are the new EU members ready for the EURO?: A comparison of costs and benefits," Journal of Policy Modeling, Elsevier, vol. 28(1), pages 25-38, January.
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  5. Erkel-Rousse, Hélène & Melitz, Jacques, 1995. "New Empirical Evidence on the Costs of European Monetary Union," CEPR Discussion Papers 1169, C.E.P.R. Discussion Papers.
  6. Bayoumi, Tamim & Masson, Paul R, 1994. "Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe," CEPR Discussion Papers 1057, C.E.P.R. Discussion Papers.
  7. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  8. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  9. Masson, Paul R & Taylor, Mark P, 1992. "Common Currency Areas and Currency Unions: An Analysis of the Issues," CEPR Discussion Papers 617, C.E.P.R. Discussion Papers.
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  11. Canzoneri, Matthew B & Rogers, Carol Ann, 1990. "Is the European Community an Optimal Currency Area? Optimal Taxation versus the Cost of Multiple Currencies," American Economic Review, American Economic Association, vol. 80(3), pages 419-33, June.
  12. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  13. Michel Beine & FréDéric Docquier, 1998. "A Stochastic Simulation Model of an Optimum Currency Area," Open Economies Review, Springer, vol. 9(3), pages 229-257, July.
  14. Minford, Patrick, 1995. "Other people's money: Cash-in-advance microfoundations for optimal currency areas," Journal of International Money and Finance, Elsevier, vol. 14(3), pages 427-440, June.
  15. W.H. Buiter, 1995. "Macroeconomic Policy During a Transition to Monetary Union," CEP Discussion Papers dp0261, Centre for Economic Performance, LSE.
  16. Mongelli, Francesco Paolo, 2002. ""New" views on the optimum currency area theory: what is EMU telling us?," Working Paper Series 0138, European Central Bank.
  17. Agnès Bénassy-Quéré & Amina Lahrèche-Révil, 2000. "The Euro as a Monetary Anchor in the CEECs," Open Economies Review, Springer, vol. 11(4), pages 303-321, October.
  18. Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 105(1), pages 48-65, September.
  19. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
  20. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, vol. 5(2), pages 211-230, March.
  21. U. Michael Bergman & Michael M. Hutchison & Yin-Wong Cheung, . "Should the Nordic Countries Join A European Monetary Union? An Empirical Analysis," EPRU Working Paper Series 97-21, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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  23. Fleming, J Marcus, 1971. "On Exchange Rate Unification," Economic Journal, Royal Economic Society, vol. 81(323), pages 467-88, September.
  24. repec:crs:wpaper:9516 is not listed on IDEAS
  25. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  26. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
  27. Ugo Fasano-Filho & Andrea Schaechter, 2003. "Monetary Union Among Member Countries of the Gulf Cooperation Council," IMF Occasional Papers 223, International Monetary Fund.
  28. Dornbusch, Rudiger & Mussa, Michael, 1975. "Consumption, Real Balances and the Hoarding Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 415-21, June.
  29. von Hagen, Jürgen, 1995. "Reciprocity and Inflation in Federal Monetary Unions," CEPR Discussion Papers 1297, C.E.P.R. Discussion Papers.
  30. Georgios Karras, 2007. "Is Africa an Optimum Currency Area? A Comparison of Macroeconomic Costs and Benefits," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(2), pages 234-258, March.
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