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A Model of an Optimum Currency Area

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  • Ricci, Luca Antonio

Abstract

This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed 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 and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, and transactions costs. 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. Also, prospective member countries do not necessarily agree on whether a given currency union should be created.

Suggested Citation

  • Ricci, Luca Antonio, 2007. "A Model of an Optimum Currency Area," Economics Discussion Papers 2007-45, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:6172
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    More about this item

    Keywords

    Optimum currency areas; cost-benefit analysis; exchange rate regimes; currency union; monetary integration;
    All these keywords.

    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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