The Theory of Optimum Currency Areas, Trade Adjustment and Trade

Jacques Melitz

No 847, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper seeks to integrate more closely the theory of optimum currency areas with the theory of international trade. The currency area is considered as a continuous variable ranging from zero to one: zero if there is no enlargement, and some positive value otherwise, corresponding exactly to the percentage of trade in the enlarged area. The benefits of widening a currency area are then treated in the same way as a reduction in transportation costs. The costs of widening a currency area, in turn, are seen as a drop in the speed of adjustment of the terms of trade to their long-run equilibrium level. On this basis it is shown that the marginal benefits of enlarging a currency area fall, the marginal costs rise, and an optimum size arises. This size depends heavily on the optimal composition of the members, however.

Keywords: Exchange Rate Regime; International Trade; Optimum Currency Area; Trade Adjustment (search for similar items in EconPapers)
JEL-codes: F02 F15 F40 (search for similar items in EconPapers)
Date: 1993-10
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=847 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The theory of optimum currency areas, trade adjustment, and trade (1996)
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:cpr:ceprdp:847

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=847

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().