Currency Areas and International Assistance

Tim Worrall () and Pierre M. Picard ()

No KERP 2007/01, Keele Economics Research Papers from Centre for Economic Research, Keele University

Abstract: This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.

Keywords: Monetary Union; Currency Areas; Fiscal Federalism; Limited Commitment; Mutual Insurance (search for similar items in EconPapers)
JEL-codes: F12 F15 F31 F33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
Date: Written
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Working Paper: Currency areas and international assistance (2007)
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