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 in 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 within and across areas 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 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 rationalize the process of the creation and enlargement of the eurozone.


Year:
2013
Publisher:
Center for Fiscal Policy Working Paper Series
Keywords:
Note:
JEL Classification: E52, E61, F41
Laboratories:




 Record created 2013-03-04, last modified 2018-03-17

n/a:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)