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A Model of an Optimum Currency Area

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Listed author(s):
  • 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.

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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
Handle: RePEc:imf:imfwpa:97/76
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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;

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Find related papers by 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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  9. repec:crs:wpaper:9516 is not listed on IDEAS
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  21. Michel Beine & FréDéric Docquier, 1998. "A Stochastic Simulation Model of an Optimum Currency Area," Open Economies Review, Springer, vol. 9(3), pages 229-257, July.
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  24. Luca Ricci, 2006. "Uncertainty, Flexible Exchange Rates, and Agglomeration," Open Economies Review, Springer, vol. 17(2), pages 197-219, April.
  25. 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.
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