A Model of an Optimum Currency Area

Luca Ricci

No 1997/076, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the circumstances under which it is beneficial to participate in a currency area. A two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, correlation of monetary shocks, and benefits of a single currency. The effect of openness on the net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area. Countries do not necessarily agree on whether a given currency union should be created.

Keywords: WP; exchange rate; single currency; deutsche mark; Optimum currency areas; cost-benefit analysis; exchange rate regimes; currency union; monetary integration; aggregate money endowment; net benefit; full employment; money balance; money-velocity shock; currency redistribution; constant returns to scale; open economy; inflation convergence; optimum currency area literature; endowment of country; aggregate money endowment of country; Monetary unions; Exchange rate flexibility; Currencies; Inflation; Labor mobility; Europe (search for similar items in EconPapers)
Pages: 41
Date: 1997-06-01
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Citations: View citations in EconPapers (25)

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Related works:
Journal Article: A Model of an Optimum Currency Area (2008)
Working Paper: A Model of an Optimum Currency Area (2007)
Working Paper: A model of an optimum currency area (1996)
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