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A Model of an Optimum Currency Area

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  • Luca A Ricci

Abstract

This paper investigates the circumstances under which it is beneficial to participate in a currency area. A two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, correlation of monetary shocks, and benefits of a single currency. The effect of openness on the net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area. Countries do not necessarily agree on whether a given currency union should be created.

Suggested Citation

  • Luca A Ricci, 1997. "A Model of an Optimum Currency Area," IMF Working Papers 97/76, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:97/76
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    More about this item

    Keywords

    Monetary unions; Optimum currency areas; cost-benefit analysis; exchange rate regimes; currency union; monetary integration; inflation; exchange rate; monetary shocks; exchange rates; currency areas;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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