Working Paper: CEPR ID: DP595
Authors: Alessandra Casella
Abstract: Two countries adopting a common currency share the same monetary policy and save on transaction costs. This paper studies the impact of these two factors on the composition of markets. The establishment of a monetary union alters the boundaries between domestic and international markets and triggers distributional effects, creating disagreement among citizens over the desirability of the union. The outcome of a referendum on the choice between national currencies and monetary union depends on the country's level of development, suggesting that a common currency will be favoured by a majority of traders in both countries only at a particular stage.
Keywords: common currency; voting; transaction costs
JEL Codes: F15; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common currency (F36) | reduced transaction costs (D23) |
| reduced transaction costs (D23) | increased size of international markets (F69) |
| common currency (F36) | increased size of international markets (F69) |
| monetary union (F36) | distributional effects (D39) |
| level of development (O11) | voting behavior regarding common currency (F36) |
| inflation (E31) | returns from trade (F19) |
| higher inflation countries (E31) | favor monetary unification (F45) |