On the benefits of a monetary union: does it pay to be bigger?
On the benefits of a monetary union: does it pay to be bigger?
This paper revisits the question of the appropriate domain of a currency area using a New-Keynesian open economy model in which the world is split into two areas, each framed as a continuum of small open regions. We show that the adoption of a common currency like the euro can be beneficial for the members of the monetary union, since the spill-over effects generated by the inflationary policies of the small open economies are likely to outweigh the costs of not tailoring monetary policy to country-specific shocks. We also show that while the enlargement of the monetary union to another group of small open economies can bring about welfare gains for all countries involved, monetary integration of two large economies, such as the euro area and the U.S., will not. These findings can help to rationalize the process of the creation and enlargement of multi-country currency areas like the eurozone.
new keynesian open economy macroeconomics, optimal monetary policy, currency area, terms-of-trade externality
448-463
Forlati, Chiara
7be0a723-e9b7-4247-8d6f-bfe224d61845
November 2015
Forlati, Chiara
7be0a723-e9b7-4247-8d6f-bfe224d61845
Forlati, Chiara
(2015)
On the benefits of a monetary union: does it pay to be bigger?
Journal of International Economics, 97 (2), .
(doi:10.1016/j.jinteco.2015.07.001).
Abstract
This paper revisits the question of the appropriate domain of a currency area using a New-Keynesian open economy model in which the world is split into two areas, each framed as a continuum of small open regions. We show that the adoption of a common currency like the euro can be beneficial for the members of the monetary union, since the spill-over effects generated by the inflationary policies of the small open economies are likely to outweigh the costs of not tailoring monetary policy to country-specific shocks. We also show that while the enlargement of the monetary union to another group of small open economies can bring about welfare gains for all countries involved, monetary integration of two large economies, such as the euro area and the U.S., will not. These findings can help to rationalize the process of the creation and enlargement of multi-country currency areas like the eurozone.
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ForlatiRevision15.pdf
- Accepted Manuscript
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AppendixForlati15.pdf
- Accepted Manuscript
More information
Accepted/In Press date: 9 July 2015
e-pub ahead of print date: 12 August 2015
Published date: November 2015
Keywords:
new keynesian open economy macroeconomics, optimal monetary policy, currency area, terms-of-trade externality
Organisations:
Economics
Identifiers
Local EPrints ID: 382369
URI: http://eprints.soton.ac.uk/id/eprint/382369
ISSN: 0022-1996
PURE UUID: d886619c-2164-43e1-a18f-1e315e18eed5
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Date deposited: 14 Oct 2015 14:06
Last modified: 15 Mar 2024 03:50
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