Currency Areas and International Assistance

Timothy Worrall and Pierre Picard

No 903, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the standard result.

Date: 2009
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Related works:
Working Paper: Currency areas and international assistance (2007)
Working Paper: Currency Areas and International Assistance (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed009:903

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