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A Model of An Optimum Currency Area

  • Luca Antonio Ricci

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 97/76.

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Length: 41
Date of creation: 01 Jun 1997
Date of revision:
Handle: RePEc:imf:imfwpa:97/76
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  1. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  2. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  3. Mongelli, Francesco Paolo, 2002. "ìNew" Views on the Optimum Currency Area Theory: What is EMU Telling US?," Royal Economic Society Annual Conference 2002 140, Royal Economic Society.
  4. Charles Wyplosz, 1997. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 3-21, Fall.
  5. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  6. Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 105(1), pages 48-65, September.
  7. Masson, Paul R & Taylor, Mark P, 1992. "Common Currency Areas and Currency Unions: An Analysis of the Issues," CEPR Discussion Papers 617, C.E.P.R. Discussion Papers.
  8. Ruby Randall & Jorge Shepherd & Frits Van Beek & J. R. Rosales & Mayra Rebecca Zermeno Livas, 2000. "The Eastern Caribbean Currency Union; Institutions, Performance, and Policy Issues," IMF Occasional Papers 195, International Monetary Fund.
  9. Buiter, Willem H., 1995. "Macroeconomic Policy During a Transition to Monetary Union," CEPR Discussion Papers 1222, C.E.P.R. Discussion Papers.
  10. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  11. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
  12. Georgios Karras, 2007. "Is Africa an Optimum Currency Area? A Comparison of Macroeconomic Costs and Benefits," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(2), pages 234-258, March.
  13. Ugo Fasano-Filho & Andrea Schaechter, 2003. "Monetary Union Among Member Countries of the Gulf Cooperation Council," IMF Occasional Papers 223, International Monetary Fund.
  14. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, vol. 5(2), pages 211-230, March.
  15. repec:fth:inseep:9516 is not listed on IDEAS
  16. Canzoneri, Matthew B & Rogers, Carol Ann, 1990. "Is the European Community an Optimal Currency Area? Optimal Taxation versus the Cost of Multiple Currencies," American Economic Review, American Economic Association, vol. 80(3), pages 419-33, June.
  17. U. Michael Bergman & Michael M. Hutchison & Yin-Wong Cheung, . "Should the Nordic Countries Join A European Monetary Union? An Empirical Analysis," EPRU Working Paper Series 97-21, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  18. Luca Ricci, 2006. "Uncertainty, Flexible Exchange Rates, and Agglomeration," Open Economies Review, Springer, vol. 17(2), pages 197-219, April.
  19. von Hagen, Jürgen, 1995. "Reciprocity and Inflation in Federal Monetary Unions," CEPR Discussion Papers 1297, C.E.P.R. Discussion Papers.
  20. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  21. Fleming, J Marcus, 1971. "On Exchange Rate Unification," Economic Journal, Royal Economic Society, vol. 81(323), pages 467-88, September.
  22. Minford, Patrick, 1995. "Other people's money: Cash-in-advance microfoundations for optimal currency areas," Journal of International Money and Finance, Elsevier, vol. 14(3), pages 427-440, June.
  23. Dornbusch, Rudiger & Mussa, Michael, 1975. "Consumption, Real Balances and the Hoarding Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 415-21, June.
  24. Bayoumi, Tamim & Masson, Paul R., 1995. "Fiscal flows in the United States and Canada: Lessons for monetary union in Europe," European Economic Review, Elsevier, vol. 39(2), pages 253-274, February.
  25. Furceri, Davide & Karras, Georgios, 2006. "Are the new EU members ready for the EURO?: A comparison of costs and benefits," Journal of Policy Modeling, Elsevier, vol. 28(1), pages 25-38, January.
  26. Erkel-Rousse, Hélène & Melitz, Jacques, 1995. "New Empirical Evidence on the Costs of European Monetary Union," CEPR Discussion Papers 1169, C.E.P.R. Discussion Papers.
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