Mundell Revisited: A simple approach to the Costs and Benefits of a Single Currency Area
This paper develops an analytical model to evaluate the costs and benefits of a single currency area within a unified framework, inspired by the separate arguments of Mundell (1961) and (1973). The more familiar argument is that, in the presence of country-specific shocks, a single currency area imposes a welfare cost associated with the lack of exchange rate adjustment. But Mundell (1973) argues that a single currency area offers risk-sharing benefits in the face of country-specific shocks and restricted ability for capital markets to facilitate consumption insurance. In our model, a single currency area, as compared with a system of national currencies and floating exchange rates, brings both welfare costs associated with the absence of exchange rate adjustment and welfare benefits associated with risksharing. The model provides a utility-based comparison of costs versus benefits. While theoretically, either monetary regime may dominate, quantitatively, the net welfare benefits of a single currency area are likely to be negative.
|Date of creation:||Nov 2000|
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- Barry Eichengreen, 1998.
"Does Mercosur Need a Single Currency,"
NBER Working Papers
6821, National Bureau of Economic Research, Inc.
- Barry Eichengreen., 1998. "Does Mercosur Need a Single Currency?," Center for International and Development Economics Research (CIDER) Working Papers C98-103, University of California at Berkeley.
- Eichengreen, Barry, 1998. "Does Mercosur Need a Single Currency?," Center for International and Development Economics Research, Working Paper Series qt6fw631qn, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
- Barry Eichengreen, 2000. "Does Mercosur Need a Single Currency?," International Finance 0003006, EconWPA.
- Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000. "On Regional Monetary Arrangements for ASEAN," Journal of the Japanese and International Economies, Elsevier, vol. 14(2), pages 121-148, June.
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