Working Paper: CEPR ID: DP968
Authors: Tamim Bayoumi
Abstract: A model of optimum currency areas is presented using a general equilibrium model with regionally differentiated goods. The choice of a currency union depends upon the size of the underlying disturbances, the correlation between these disturbances, the costs of transactions across currencies, factor mobility across regions, and the interrelationships between demand for different goods. It is found that, while a currency union can raise the welfare of the regions within the union, it unambiguously lowers welfare for those outside the union.
Keywords: Optimum Currency Areas
JEL Codes: F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Joining a currency union (F36) | Raise welfare of regions within the union (R13) |
| Lower transaction costs (D23) | Raise welfare of regions within the union (R13) |
| Joining a currency union (F36) | Lower welfare for regions outside the union (D69) |
| Output losses for non-member regions (R15) | Lower welfare for regions outside the union (D69) |
| Nominal rigidity in wages and common exchange rate (F31) | Output losses for non-member regions (R15) |
| Incentives for a region to join a union (F55) | Greater than incentives for the union to admit new members (J51) |