Do Currency Unions Grow Too Large for Their Own Good?

John Maloney and Malcolm Macmillen

Economic Journal, 1999, vol. 109, issue 458, 572-87

Abstract: This article puts a rigorous foundation under the proposition that currency areas, as they admit more members, face a rising marginal cost curve which cuts the marginal benefit curve from below. However, at any given time, the median member faces lower marginal cost than the average member, so that, if new members are admitted by majority vote, and existing members are myopic, the currency area will expand beyond its optimum size. Although the currency area imposes negative externalities on countries outside it, we find that the existence of one currency union has no effect on the costs or benefits of forming or enlarging another.

Date: 1999
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