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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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  4. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  5. 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.
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  7. 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.
  8. Willem H. Buiter, 1995. "Macroeconomic policy during a transition to monetary union," LSE Research Online Documents on Economics 20701, London School of Economics and Political Science, LSE Library.
  9. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
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  11. von Hagen, Jürgen, 1995. "Reciprocity and Inflation in Federal Monetary Unions," CEPR Discussion Papers 1297, C.E.P.R. Discussion Papers.
  12. Luca Ricci, 2006. "Uncertainty, Flexible Exchange Rates, and Agglomeration," Open Economies Review, Springer, vol. 17(2), pages 197-219, April.
  13. 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.
  14. 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 823-839, December.
  15. 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 419-433, June.
  16. 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.
  17. 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.
  18. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
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  22. repec:crs:wpaper:9516 is not listed on IDEAS
  23. Charles Wyplosz, 1997. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 3-21, Fall.
  24. 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.
  25. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
  26. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, vol. 5(2), pages 211-230, March.
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  30. Ruby Randall & Jorge Shepherd & Frits Van Beek & J. R. Rosales & Mayra Rebecca Zermeno, 2000. "The Eastern Caribbean Currency Union; Institutions, Performance, and Policy Issues," IMF Occasional Papers 195, International Monetary Fund.
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