Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities

November 1, 2004

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Format: Chicago

Etienne B Yehoue. Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities, (USA: International Monetary Fund, 2004) accessed December 26, 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

The recent experience of the European Economic and Monetary Union (EMU) has stimulated the debate over currency union and reinforced the incentive for the emergence of currency blocs in other regions of the world. This paper builds a dynamic stochastic model-based on network externalities operating through trade channels-to explain the emergence of currency blocs, and specifically, why some countries join a currency union earlier than others. The paper develops and formalizes the intuition that currency bloc formation is path dependent, and that countries join currency blocs sooner the more they trade with the bloc member countries, with each additional member serving in a dynamic way to attract more members into the bloc. Evidence from the current pattern of EMU expansion supports the model, which is later used to elaborate on the pattern of further expansion of the union.

Subject: Currencies, Inflation, Monetary unions, Trade agreements, Trade balance

Keywords: Common currency, Currency bloc, Monetary policy, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/222
Stock No:

WPIEA2222004
ISBN:

9781451875294
ISSN:

1018-5941

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