Risk Sharing and the Theory of Optimal Currency Areas: A Re-examination of Mundell 1973
Mundell (1973) argues that a common currency area provides benefits for its members by offering insurance against region-specific shocks. We develop a simple model to analyse the nature of risksharing benefits of a single currency area for emerging market economies, based on Mundell's hypothesis. An important pre-requisite for the risk-sharing benefits of a single currency is that there be limited trade among countries in national-currency denominated bonds. The evidence for emerging markets supports this assumption. In this case, we show that a single currency area may support risk sharing that could not be achieved under floating exchange rates. Based on a simple quantitative evaluation of our model, we show that the implied risk sharing can be substantial.
|Date of creation:||Nov 2000|
|Date of revision:|
|Contact details of provider:|| Postal: 55th Floor , Two International Finance Centre , 8 Finance Street , Central, Hong Kong|
Phone: (852)2878 1978
Fax: (852)2878 7006
Web page: http://www.hkimr.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Helpman, Elhanan, 1981.
"An Exploration in the Theory of Exchange-Rate Regimes,"
3445091, Harvard University Department of Economics.
- Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October.
- Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
- Tesar, Linda L., 1995. "Evaluating the gains from international risksharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 95-143, June.
- Persson, Torsten & Svensson, Lars E. O., 1989.
"Exchange rate variability and asset trade,"
Journal of Monetary Economics,
Elsevier, vol. 23(3), pages 485-509, May.
- Eichengreen, Barry & Bayoumi, Tamim, 1996.
"Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations,"
Center for International and Development Economics Research, Working Paper Series
qt1td5x343, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
- Barry Eichengreen and Tamim Bayoumi., 1996. "Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations," Center for International and Development Economics Research (CIDER) Working Papers C96-081, University of California at Berkeley.
When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:082000. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HKIMR)
If references are entirely missing, you can add them using this form.