Instability and trade in currency areas

Alberto Alonso and Vanesa Guzmán
Authors registered in the RePEc Author Service: Luis C. Corchon

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We present a model of a currency area in which labor markets of country members are isolated but there is trade among these countries. When a country experiences a negative (resp. positive) shock, inflation goes down (up). This causes two effects. On the one hand the real interest rate of this country increases (decreases). On the other hand the goods produced in this country become more (less) competitive. We show that the stability of the system depends on several factors, including a large competitive effect, how inflation expectations are formed and fiscal policy. In general, stability requires a trade-off between the rationality of expectations and budget balance.

Date: 2004-06
New Economics Papers: this item is included in nep-ifn
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Related works:
Journal Article: Instability and trade in currency areas (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we043010

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