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A Formal Model of Optimum Currency Areas

Author

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  • Mr. Tamim Bayoumi

Abstract

A model of optimum currency areas is presented using a general equilibrium model with regionally differentiated goods. The choice of a currency union depends upon the size of the underlying disturbances, the correlation between these disturbances, the costs of transactions across currencies, factor mobility across regions, and the interrelationships between demand for different goods. It is found that, while a currency union can raise the welfare of the regions within the union, it unambiguously lowers welfare for those outside the union.

Suggested Citation

  • Mr. Tamim Bayoumi, 1994. "A Formal Model of Optimum Currency Areas," IMF Working Papers 1994/042, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1994/042
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    Keywords

    WP; currency union; entrepot trade; union in a bloc; single currency zone; choice of a currency union; cost t; currency union in a bloc; results from a currency union; two-region currency union; larger currency union; exchange rate Ei; separate currency; existing currency union; Monetary unions; Exchange rates; Labor demand; Employment;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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