|This centre is a member of The LSE Research Laboratory [RLAB]: CASE | CEE | CEP | SERC | STICERD||Cookies?|
Paper No' CEPDP0467: | Full paper
Save Reference as: BibTeX File | EndNote Import File
Keywords: Monetary unions; exchange rate regimes; policy domains
Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: CEP Discussion Papers
Share this page: Google Bookmarks | Facebook | Twitter
Abstract:Emerging-market countries are being urged to choose between freely floating exchange rates and firmly fixed rates supported by strong institutional arrangementsûcurrency boards, monetary unions, or formal dollarization. This paper assesses the benefits and costs of institutionalizing fixed rates by synthesizing and supplementing the theory of optimum currency areas (OCA theory). It shows that (1) OCA theory and related empirical work have been excessively influenced by the special case used originally by Robert Mundell, where exogenous shocks display mirror-image asymmetry; (2) OCA theory ignores a vital difference between the domains of monetary policy under a monetary union and other institutional arrangements; (3) because it neglects the way in which a monetary union reduces the debt-creating effects of fiscal stabilizers, OCA theory understates the strength of the case for combining a monetary union with a fiscal federation. The paper also criticizes recent work by Jeffrey Frankel and Andrew Rose in which they claim to show that monetary union reduces asymmetric shocks and thus makes monetary union less costly. The paper suggests that their results may reflect the effects of monetary union on the transmission of shocks rather than their incidence.
Copyright © RLAB & LSE 2003 - 2014 | LSE, Houghton Street, London WC2A 2AE | Contact: RLAB | Site updated 20 December 2014