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Deciding on Monetary Integration: An Operational Approach

  • Powell, Andrew

    (Inter-American Development Bank and Universidad Torcuato Di Tella)

  • Sturzenegger, Federico

    (Harvard U and Universidad Torcuato Di Tella)

We develop a simple, n-country model to consider the costs and benefits of joining a monetary union. Our factor-OCA framework encompasses different approaches and allows us to consider the optimal composition of a monetary union for all the potential members. We illustrate the model in practice with various simulations and we develop two empirical applications based on expanding EMU and on whether there would be a benefit to deepening Nafta to be a monetary union. While some commentators have called for a one-world currency, we find full monetary integration has costs for some countries and benefits for others, perhaps explaining why this remains a controversial issue.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-041.

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Date of creation: Sep 2007
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Handle: RePEc:ecl:harjfk:rwp07-041
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  1. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
  2. Charles R. Bean, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 31-52, Fall.
  3. Bayoumi, Tamim & Eichengreen, Barry, 1994. "Monetary and exchange rate arrangements for NAFTA," Journal of Development Economics, Elsevier, vol. 43(1), pages 125-165, February.
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