Working Paper: CEPR ID: DP2659
Authors: Andrew K. Rose; Charles Engel
Abstract: This Paper characterizes the integration patterns of international currency unions (such as the CFA Franc zone and the East Caribbean Currency Area). We empirically explore different features of currency unions, and compare them both to countries with sovereign monies, and to regions within nations. We ask: are countries within international currency unions as integrated as regions within political unions? We do this by examining the criteria for Mundell?s concept of an optimum currency area. We find that members of currency unions are more integrated than countries with their own currencies, but less integrated than regions within a country. For instance, we find that currency union members have more trade and less volatile real exchange rates than countries with their own monies, but less trade and more volatile exchange rates than regions within individual countries. Similarly, business cycles are more highly synchronized across currency union countries than across countries with sovereign monies, but not as synchronized as regions of a single country. Finally, currency union membership is not associated with significantly greater risk sharing, though risk sharing is widespread within countries.
Keywords: currency unions; international integration; trade; business cycle; risk sharing
JEL Codes: F15; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Currency union membership (F36) | Greater trade volumes (F10) |
| Currency union membership (F36) | Less volatile real exchange rates (F31) |
| Currency union membership (F36) | More synchronized business cycles (F44) |
| Currency union membership (F36) | Enhanced risk sharing (G19) |