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Currency Areas and Voluntary Transfers

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  • Pierre M. Picard

    (CREA, Université de Luxembourg)

  • Tim Worrall

    (University of Edinburgh)

Abstract

This paper discusses the relationship between the formation of a currency area and the use of voluntary fiscal transfers between countries. We show that there is a trade off between the benefits of flexible exchange rates and the additional risk sharing benefits of voluntary transfers that can be sustained in a currency area. We show that whether a currency area is beneficial or not will depend on the magnitude of economic parameter values. In particular, we show that in a simple two country model and for a plausible set of economic parameter values, a currency area is optimal.

Suggested Citation

  • Pierre M. Picard & Tim Worrall, 2015. "Currency Areas and Voluntary Transfers," DEM Discussion Paper Series 15-12, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:15-12
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    File URL: https://hdl.handle.net/10993/25727
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    Cited by:

    1. Masashige Hamano & Pierre M. Picard, 2017. "Extensive and intensive margins and exchange rate regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 804-837, August.
    2. Trionfetti, Federico, 2018. "Firm heterogeneity, comparative advantage and the transfer problem," European Economic Review, Elsevier, vol. 108(C), pages 246-258.
    3. Guo, Dong & Zhou, Peng, 2021. "The rise of a new anchor currency in RCEP? A tale of three currencies," Economic Modelling, Elsevier, vol. 104(C).

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    More about this item

    Keywords

    Monetary Union; Currency Areas; Fiscal Federalism; Limited Commitment; Mutual Insurance;
    All these keywords.

    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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