A Model of an Optimum Currency Area
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Summary:
This paper investigates the circumstances under which it is beneficial to participate in a currency area. A 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 shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, correlation of monetary shocks, and benefits of a single currency. 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. Countries do not necessarily agree on whether a given currency union should be created.
Series:
Working Paper No. 1997/076
Subject:
Currencies Economic integration Exchange rate flexibility Foreign exchange Inflation Labor Labor mobility Monetary unions Money Prices
English
Publication Date:
June 1, 1997
ISBN/ISSN:
9781451849837/1018-5941
Stock No:
WPIEA0761997
Pages:
41
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