A Model of An Optimum Currency Area

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International Monetary Fund, Jun 1, 1997 - Business & Economics - 41 pages
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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.
 

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Contents

Summary
4
I Introduction
5
II The Model
12
III Shocks and Adjustment
21
IV CostBenefit Analysis of A Currency Union
27
V Conclusions
32
Appendix
36
References
37
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