A Model of an Optimum Currency Area

Luca Antonio Ricci ()

No 2007-45, Economics Discussion Papers from Kiel Institute for the World Economy

Abstract: This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed 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 and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, and transactions costs. 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. Also, prospective member countries do not necessarily agree on whether a given currency union should be created.

Keywords: Optimum currency areas; cost-benefit analysis; exchange rate regimes; currency union; monetary integration (search for similar items in EconPapers)
JEL-codes: E42 E52 E61 F02 F31 F33 F36 F4 H77 J61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
Date: 2007

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Related works:
Working Paper: A Model of an Optimum Currency Area (1997)
Journal Article: A Model of an Optimum Currency Area (2008)
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