Unit of account, sovereign debt, and optimal currency area

Kenta Toyofuku

Journal of International Financial Markets, Institutions and Money, 2021, vol. 75, issue C

Abstract: This paper considers how the choice of a unit of account affects the formation of an optimal currency area (OCA). First, we show that forming a currency union internalizes the exchange rate risk and leads to smoothing of consumption levels. However, changing the unit of account of the inherited sovereign debt to a common currency may increase a country’s debt burden if a debtor country is more likely to face a trade deficit within the union. Therefore, the OCA is determined by this trade-off and the debtor country may be better off choosing not to enter the currency union when it faces a high inherited sovereign debt.

Keywords: Optimal currency area; Unit of account; Sovereign debt; Bailout (search for similar items in EconPapers)
JEL-codes: E40 F33 F45 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:75:y:2021:i:c:s1042443121001529

DOI: 10.1016/j.intfin.2021.101441

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