Working Paper: NBER ID: w1634
Authors: Jorge Braga de Macedo
Abstract: In a previous analysis of the West African Monetary Union, Macedo(1985a), size is taken to be a major structural characteristic of a country in the sense that large countries are not affected by disturbances originating in small countries but small countries are affected by large countries' domestic disturbances. In this paper, we generalize some of the results and present the structure of the model in moredetail. Using a four-country, two-tier macroeconomic model, it is shown that the pseudo-exchange rate union of the two small countries with the large partner has no effect on their real exchange rates but affects their price levels, whereas a full monetary union requires in principle a transfer from the large partner in the union. The allocation of this transfer between the two small countries by their common central bank will have real effects when the allocation rule differs from the steady-state monetary distribution.
Keywords: monetary unions; small countries; economic stability; exchange rates
JEL Codes: E42; E58; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pseudo-exchange rate union (F31) | price levels (E30) |
| pseudo-exchange rate union (F31) | real exchange rates (F31) |
| full monetary union (F36) | transfer from large partner (F16) |
| transfer from large partner (F16) | price levels (E30) |
| transfer from large partner (F16) | economic output (E23) |