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Currency Unions and International Assistance

Author

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  • Pierre M. Picard
  • Tim Worrall

    (CREA, University of Luxembourg)

Abstract

This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risksharing is limited by enforcement constraints of cross border assistance. It is shown that, when one takes into account risk-sharing and limited commitment, fixed exchange rate regimes associated with a currency area can dominate flexible exchange rate regimes, which reverses the standard result.

Suggested Citation

  • Pierre M. Picard & Tim Worrall, 2009. "Currency Unions and International Assistance," DEM Discussion Paper Series 09-01, Department of Economics at the University of Luxembourg.
  • Handle: RePEc:luc:wpaper:09-01
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    File URL: http://wwwen.uni.lu/content/download/21062/260397/file/2009-01_Currency%20Unions%20and%20International%20Assistance.pdf
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    References listed on IDEAS

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    3. Forni, Mario & Reichlin, Lucrezia, 1999. "Risk and potential insurance in Europe," European Economic Review, Elsevier, vol. 43(7), pages 1237-1256, June.
    4. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
    5. Alesina, Alberto & Perotti, Roberto & Spolaore, Enrico, 1995. "Togetheror separately? Issues on the costs and benefits of political and fiscal unions," European Economic Review, Elsevier, vol. 39(3-4), pages 751-758, April.
    6. Dreze, Jacques H, 2000. " Economic and Social Security in the Twenty-First Century, with Attention to Europe," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 327-348, June.
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    Cited by:

    1. Étienne Farvaque & Florence Huart, 2016. "Drowned by Numbers? Designing an EU-wide Unemployment Insurance," CIRANO Working Papers 2016s-33, CIRANO.
    2. Masashige Hamano & Pierre M. Picard, 2017. "Extensive and intensive margins and exchange rate regimes," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(3), pages 804-837, August.

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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