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Monetary unions and the transaction cost savings of a single currency

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  • Hugo Rodríguez

Abstract

This paper studies the transaction cost savings of moving from a multi-currency exchange system to a single currency one. The analysis concentrates exclusively on the transaction and precautionary demand for money and abstracts from any other motives to hold currency. A continuous-time, stochastic Baumol- like model similar to that in Frenkel and Jovanovic (1980) is generalized to include several currencies and calibrated to fit European data. The analysis implies an upper bound for the savings associated with reductions of transaction costs derived from the European Monetary Union of approximately 0.6\% of the Community GDP. Additionally, the magnitudes of the brokerage fee and the volatility of transactions, whose estimation has traditionally been difficult to address empirically, are approximated for Europe.

Suggested Citation

  • Hugo Rodríguez, 1998. "Monetary unions and the transaction cost savings of a single currency," Economics Working Papers 291, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:291
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    References listed on IDEAS

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    1. Jacob A. Frenkel & Boyan Jovanovic, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(1), pages 25-43.
    2. Guidotti, Pablo E, 1993. "Currency Substitution and Financial Innovation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 109-124, February.
    3. Barro, Robert J & Santomero, Anthony J, 1972. "Household Money Holdings and The Demand Deposit Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(2), pages 397-413, May.
    4. Lieberman, Charles, 1977. "The Transactions Demand for Money and Technological Change," The Review of Economics and Statistics, MIT Press, vol. 59(3), pages 307-317, August.
    5. Baumol, William J & Tobin, James, 1989. "The Optimal Cash Balance Proposition: Maurice Allais' Priority," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1160-1162, September.
    6. Chang, Fwu-Ranq, 1999. "Homogeneity and the Transactions Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 720-730, November.
    7. Robert M. Adams, 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
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    Citations

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    Cited by:

    1. Maurice Obstfeld, 1998. "Open‐Economy Macroeconomics: Developments in Theory and Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 247-275, March.
    2. Alvarez, Fernando & Dixit, Avinash, 2014. "A real options perspective on the future of the Euro," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 78-109.
    3. Bonpasse, Morrison, 2007. "The Single Global Currency - Common Cents for Business," MPRA Paper 6199, University Library of Munich, Germany.
    4. repec:zbw:rwirep:0489 is not listed on IDEAS
    5. Timo Baas, 2014. "Estonia and the European Monetary Union – Are there Benefi ts from a “Late” Accession?," Ruhr Economic Papers 0489, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    6. Bonpasse, Morrison, 2008. "The Single Global Currency - Common Cents for Commerce," MPRA Paper 7002, University Library of Munich, Germany.
    7. Hugo Rodríguez, 1998. "The variability of money velocity in a generalized cash-in-advance model," Economics Working Papers 320, Department of Economics and Business, Universitat Pompeu Fabra.

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    More about this item

    Keywords

    Monetary Union; demand for money; single currency; multivariate brownian motion;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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