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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.

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  • 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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    Cited by:

    1. Ricci, Luca Antonio & Isard, Peter, 2002. "European monetary union, adjustment, and exchange rate variability," European Economic Review, Elsevier, vol. 46(2), pages 229-251, February.
    2. Tomasz Brodzicki, 2012. "On optimality or non-optimality of the eurozone," Working Papers of Economics of European Integration Division 1201, The Univeristy of Gdansk, Faculty of Economics, Economics of European Integration Division.
    3. Lee, Grace H.Y. & Koh, Sharon G.M., 2012. "The prospects of a monetary union in East Asia," Economic Modelling, Elsevier, vol. 29(2), pages 96-102.
    4. Katrin Elborgh-Woytek & Julian Berengaut, 2006. "Beauty Queens and Wallflowers; Currency Unions in the Middle East and Central Asia," IMF Working Papers 06/226, International Monetary Fund.
    5. Zahir, Antia & Djoudad, Ramdane & St-Amant, Pierre, 1999. "Canada’s Exchange Rate Regime and North American Economic Integration: The Role of Risk-Sharing Mechanisms," Staff Working Papers 99-17, Bank of Canada.
    6. Horvath, Julius, 2003. "Optimum currency area theory : A selective review," BOFIT Discussion Papers 15/2003, Bank of Finland, Institute for Economies in Transition.
    7. Agénor, Pierre-Richard & Aizenman, Joshua, 2011. "Capital market imperfections and the theory of optimum currency areas," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1659-1675.
    8. Grace H.Y. Lee & M. Azali, 2009. "Optimum Currency Areas in East Asia: A Structural VAR Approach," Monash Economics Working Papers 19-09, Monash University, Department of Economics.
    9. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Económicas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    10. Agnès Bénassy-Quéré & Véronique Salins, 2010. "A Case for Intermediate Exchange-Rate Regimes," Working Papers 2010-14, CEPII research center.
    11. Charles Wyplosz, 1997. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 3-21, Fall.
    12. Gerardo Licandro, 2000. "Is Mercosur an Optimal Currency Area? A shock correlation perspective," Documentos de trabajo 2000004, Banco Central del Uruguay.
    13. Lee, Grace H.Y., 2011. "Gold dinar for the Islamic countries?," Economic Modelling, Elsevier, vol. 28(4), pages 1573-1586, July.
    14. Paolo Mauro & Grace Juhn, 2002. "Long-Run Determinants of Exchange Rate Regimes; A Simple Sensitivity Analysis," IMF Working Papers 02/104, International Monetary Fund.
    15. Laura Mădălina PÎRŞCOVEANU, 2016. "Estimating the exchange rate in the context of Romania's integration in the Eurozone," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(607), S), pages 249-258, Summer.
    16. Michel Beine & Bertrand Candelon & Alain Hecq, 2000. "Assessing a Perfect European Optimum Currency Area: A Common Cycles Approach," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(2), pages 115-132, June.
    17. Pierre Jaillet & Emmanuel Carrère, 2004. "La Zone franc, une zone monétaire robuste, en voie d’intégration économique," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 183-209.
    18. Laura Mădălina PÎRŞCOVEANU, 2016. "Estimating the exchange rate in the context of Romania's integration in the Eurozone," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(607), S), pages 249-258, Summer.
    19. Heinemann, Friedrich, 1998. "Die Theorie der optimalen Währungsräume und die politische Reformfähigkeit: Ein vernachlässigtes Kriterium," ZEW Discussion Papers 98-02, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    20. Buscher, Herbert S., 1999. "Business Cycles in EU Member States," ZEW Discussion Papers 99-16, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    21. Lucio Vinhas de Souza & Holger van Eden & Albert de Groot & Gerbert Romijn & Elisabeth Ledrut, 2001. "EMU and Enlargement: A Review of Policy Issues," Macroeconomics 0012019, EconWPA.
    22. Raoul Lättemäe, 2003. "EMU Accession Issues in Baltic Countries," Eastward Enlargement of the Euro-zone Working Papers wp17a, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 May 2003.
    23. Bamba, Lambert N'galadjo, 2004. "Analyse du Processus de Convergence Dans la Zone UEMOA," WIDER Working Paper Series 018, World Institute for Development Economic Research (UNU-WIDER).
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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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