A Formal Model of Optimum Currency Areas
Centre for Economic Policy Research, 1994 - Equilibrio (Economía política) - 25 pages
A model of optimum currency areas is presented using a general equilibrium model with regionally differentiated goods. The choice of a currency union depends upon the size of the underlying disturbances, the correlation between these disturbances, the costs of transactions across currencies, factor mobility across regions, and the interrelationships between demand for different goods. It is found that, while a currency union can raise the welfare of the regions within the union, it unambiguously lowers welfare for those outside the union.
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already existing currency assumed assumption asymmetric disturbances caused by lower change in utility common exchange rate consumption correlation costs on trade currency union depend demand for labor equal equation 15 European Monetary Union European Union excess demand exchange rate regime existing currency union existing union expected output expected utility expected value factor mobility flexible floating exchange rate form of lower formal model forming a currency full employment gains from lower Hence incentive to admit incentive to join join a currency joining the union labor market labor mobility literature on optimum log(w loss in output losses in utility lower transaction costs McKinnon Melitz microeconomic foundations model of optimum nominal rigidity nominal wages normal normal distribution numeraire optimum currency areas oſº output losses point of production productivity disturbance productivity shock raise welfare real wage result separate currencies theory of optimum underlying disturbances union and region welfare losses