Working Paper: NBER ID: w7927
Authors: Alberto Alesina; Robert J. Barro
Abstract: What is the optimal number of currencies in the world? Common currencies affect trading costs and, thereby, the amounts of trade, output, and consumption. From the perspective of monetary policy, the adoption of another country's currency trades off the benefits of commitment to price stability against the loss of an independent stabilization policy. The nature of the tradeoff depends on co-movements of disturbances, on distance, trading costs, and on institutional arrangements such as the willingness of anchor countries to accommodate to the interests of clients.
Keywords: Currency unions; Trading costs; Monetary policy
JEL Codes: E42; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adoption of a common currency (F36) | Increased trade volume and output (F10) |
| Adoption of foreign currency (F31) | Price stability vs. independent monetary policy (E63) |
| Increase in the number of countries (F69) | Decrease in the number of currencies (F31) |