Currency Areas and Voluntary Transfers

Pierre Picard and Timothy Worrall

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper discusses the relationship between the formation of a currency area and the use of voluntary fiscal transfers between countries. We show that there is a trade off between the benefits of flexible exchange rates and the additional risk sharing benefits of voluntary transfers that can be sustained in a currency area. We show that whether a currency area is beneficial or not will depend on the magnitude of economic parameter values. In particular, we show that in a simple two country model and for a plausible set of economic parameter values, a currency area is optimal.

Keywords: Monetary Union; Currency Areas; Fiscal Federalism; Limited Commitment; Mutual Insurance (search for similar items in EconPapers)
JEL-codes: F12 F15 F31 F33 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://hdl.handle.net/10993/25727 (application/pdf)

Related works:
Journal Article: Currency areas and voluntary transfers (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:15-12

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