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Optimal currency areas and customs unions: are they connected?


  • Marion Kohler


This paper examines the link between currency areas and customs unions. The size of a bloc of countries practising some form of co-ordination of monetary policy is limited by the incentive to free-ride that formation of the bloc creates. However, when the threat of a trade war is introduced, the stable size of the bloc increases. This suggests that a large currency area is more likely to emerge where it combines with acustoms union, and that the stability of both currency area and customs union are closely related, because the threat of tariff penalties can enforce co-operation.

Suggested Citation

  • Marion Kohler, 1998. "Optimal currency areas and customs unions: are they connected?," Bank of England working papers 89, Bank of England.
  • Handle: RePEc:boe:boeewp:89

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    References listed on IDEAS

    1. Jeffrey A Frankel, 1993. "Is there a Currency Bloc in the Pacific?," RBA Annual Conference Volume,in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia.
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    12. Casella, Alessandra, 1992. "Participation in a Currency Union," American Economic Review, American Economic Association, vol. 82(4), pages 847-863, September.
    13. Kohler, M, 1996. "Coalitions in International Monetary Policy Games," Economics Working Papers eco96/07, European University Institute.
    14. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, January.
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    Cited by:

    1. Gruben, William C. & Wynne, Mark A. & Zarazaga, Carlos E., 2001. "Dollarization and monetary unions: implementation guidelines," Working Papers 0105, Federal Reserve Bank of Dallas.
    2. Lamberte, Mario B. & Milo, Melanie S. & Pontines, Victor, 2001. "NO to ¥E$? Enhancing Economic Integration in East Asia through Closer Monetary Cooperation," Discussion Papers DP 2001-16, Philippine Institute for Development Studies.
    3. Kohler, Marion, 2002. "Coalition formation in international monetary policy games," Journal of International Economics, Elsevier, vol. 56(2), pages 371-385, March.

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