A Model of an Optimum Currency Area

June 1, 1997

Preview Citation

Format: Chicago

Luca A Ricci. A Model of an Optimum Currency Area, (USA: International Monetary Fund, 1997) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Currencies, Economic integration, Exchange rate flexibility, Foreign exchange, Inflation, Labor, Labor mobility, Monetary unions, Money, Prices

Keywords: Aggregate money endowment, Aggregate money endowment of country, Constant returns to scale, Cost-benefit analysis, Currencies, Currency redistribution, Currency union, Deutsche mark, Endowment of country, Europe, Exchange rate, Exchange rate flexibility, Exchange rate regimes, Full employment, Inflation, Inflation convergence, Labor mobility, Monetary integration, Monetary unions, Money balance, Money-velocity shock, Net benefit, Open economy, Optimum currency area literature, Optimum currency areas, Single currency, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/076
Stock No:

WPIEA0761997
ISBN:

9781451849837
ISSN:

1018-5941

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