Common Currency Areas and Currency Unions: An Analysis of the Issues
This paper discusses the conditions under which currency unions would be desirable and viable. We discuss and present new empirical evidence concerning the operation of existing currency unions in federal states and among regional country groupings. In particular, we examine the traditional criteria for optimal currency areas and present evidence concerning the shock-absorbing properties of federal fiscal systems and the discipline imposed on the public sector by financial markets. We also examine the implications of economic heterogeneity across a currency union, and whether or not convergence should be achieved before rather than after the union occurs. In addition, some issues relating to the possible transition towards monetary union in Europe are considered.
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argued borrowing Canada capital controls capital mobility CFA franc zone common currency area countries or regions credibility currency union Damrau debt deutsche mark discipline diversification EC Commission l990 EC countries economic and monetary effects Europe European central bank European Monetary exchange rate flexibility exports external factor mobility federal tax financing fiscal federalism fiscal flexibility fiscal policies fiscal transfers fixed exchange rates foreign exchange market Germany governments Greece hard ECU proposal income increase industrial countries inflation rates integration interest rates issue labor mobility macroeconomic member countries Miller l990 monetary authority monetary policy Mundell-Fleming model nominal exchange rate optimal currency area output percent physical capital policy coordination Portugal pressures price flexibility price stability provinces real convergence realignments reduce relative republics result Sachs and Sala-i-Martin Section sector seignorage single currency speculative attacks spillovers suggests taxes and transfers trade traditional criteria transactions costs unsustainable variables wage and price