Working Paper: CEPR ID: DP617
Authors: Paul R. Masson; Mark P. Taylor
Abstract: This paper discusses the conditions under which currency unions would be desirable and viable. We discuss and present new empirical evidence concerning the operation of existing currency unions in federal states and among regional country groupings. In particular, we examine the traditional criteria for optimal currency areas and present evidence concerning the shock-absorbing properties of federal fiscal systems and the discipline imposed on the public sector by financial markets. We also examine the implications of economic heterogeneity across a currency union, and whether or not convergence should be achieved before rather than after the union occurs. In addition, some issues relating to the possible transition towards monetary union in Europe are considered.
Keywords: currency union; monetary union; monetary policy; fiscal policy; EMU
JEL Codes: E63; F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| formation of a currency union (F36) | reduced transactions costs (D23) |
| formation of a currency union (F36) | enhanced price stability (E63) |
| high labor mobility (J61) | stability of currency unions (F36) |
| economic diversification (O29) | stability of currency unions (F36) |
| high intra-union trade (F16) | stability of currency unions (F36) |
| nominal and real convergence (F36) | stability of monetary union in Europe (F36) |
| significant divergence (F29) | undermine stability of the union (D74) |