Currency Areas and Monetary Coordination

Qing Liu and Shouyong Shi

Working Papers from University of Toronto, Department of Economics

Abstract: In this paper we integrate the recent development in monetary theory with international finance, in order to examine the coordination between two currency areas in setting long-run inflation. The model determines the value of each currency and the size of each currency area without requiring buyers to use a particular currency to buy a country's goods. We show that the two countries inflate above the Friedman rule in a non-cooperative game. Coordination between the two areas reduces inflation to the Friedman rule, increases consumption, and improves welfare of both countries. This gain from coordination increases as the two areas become more integrated in trade. These results arise from the new features of the model, such as the deviations from the law of one price and the extensive margin of trade. To illustrate these new features, we show that introducing a direct tax on foreign holdings of a currency does not eliminate a country's incentive to inflate, while it does in traditional models.

Keywords: Exchange rates; Currency areas; Coordination (search for similar items in EconPapers)
JEL-codes: E40 F41 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2006-04-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.economics.utoronto.ca/public/workingPapers/tecipa-226-1.pdf Main Text (application/pdf)

Related works:
Journal Article: CURRENCY AREAS AND MONETARY COORDINATION (2010)
Working Paper: Currency Areas and Monetary Coordination (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:tecipa-226

Access Statistics for this paper

More papers in Working Papers from University of Toronto, Department of Economics 150 St. George Street, Toronto, Ontario.
Bibliographic data for series maintained by RePEc Maintainer ().