Working Paper: NBER ID: w4805
Authors: Atish R. Ghosh; Holger C. Wolf
Abstract: Recent moves towards greater monetary integration in Western Europe - and disintegration in Eastern Europe and the former Soviet Union - have rekindled interest in the theoretical and empirical aspects of optimal currency areas (OCA). In this paper, we examine the marginal benefit of increasing the number of currency unions within a given geographical area. We look at six regions; the United States, Europe, the G7, the CFA zone, the FSU and the world at large. Our results suggest that (i) contiguous monetary unions are typically dominated by non-contiguous unions; (ii) neither Europe nor the United States form an optimum currency area, for both regions the costs of adopting a single currency exceeds estimates of the transaction cost savings; (iii) Germany and the United States will almost never find it to their (economic) advantage to join monetary unions.
Keywords: optimal currency areas; monetary unions; genetic algorithms
JEL Codes: F33; E42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Geographical proximity (R12) | Economic efficiency in currency unions (F36) |
| Costs of adopting a single currency (F36) | Optimal currency area formation (F36) |
| Germany and the United States (F55) | Preference for maintaining independent currencies (F36) |