A One World Currency? A Factor-OCA Approach to the Analysis of Monetary Integration
Most models of monetary union (MU) are two country, here we develop a simple n-country Factor-OCA approach and consider the costs and benefits of joining an MU, the costs and benefits for third parties (both MU members and non members) and hence we can consider the optimal composition of an MU for the different parties. We show the model in practice with various simulations and two empircial applications based on EMU and Nafta. While recent commentators have called for a one-world curency, we find monetary integration has costs for some countries and benefits for others, perhaps explaining why this remains an issue of considerable interest and debate.
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