Risk Sharing and the Theory of Optimal Currency Areas: A Re-examination of Mundell 1973

Stephen Ching and Michael Devereux
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Stephen Ching: City University of Hong Kong

No 82000, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Mundell (1973) argues that a common currency area provides benefits for its members by offering insurance against region-specific shocks. We develop a simple model to analyse the nature of risksharing benefits of a single currency area for emerging market economies, based on Mundell's hypothesis. An important pre-requisite for the risk-sharing benefits of a single currency is that there be limited trade among countries in national-currency denominated bonds. The evidence for emerging markets supports this assumption. In this case, we show that a single currency area may support risk sharing that could not be achieved under floating exchange rates. Based on a simple quantitative evaluation of our model, we show that the implied risk sharing can be substantial.

JEL-codes: F33 F41 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2000-11
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Citations: View citations in EconPapers (6)

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