Optimal Payment Areas or Optimal Currency Areas?

Patrick Bolton and Haizhou Huang

AEA Papers and Proceedings, 2018, vol. 108, 505-08

Abstract: We use the Optimal Capital Structure of Nations framework in Bolton and Huang (2018) to develop a new theory of Optimum Currency Areas. Whether two economically integrated nations should form an optimal currency area depends on a trade-off between financial flexibility (the value of monetary sovereignty) and monetary discipline (the commitment not to engage in competitive monetizations). We show that a monetary union works best when combined with a fiscal union and fiscal transfers. We also show that debt monetization is still desirable in a monetary union when both member-countries simultaneously face a negative output shock.

JEL-codes: E62 F33 F45 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pandp.20181058
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Citations: View citations in EconPapers (2)

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