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Mundell Revisited: a Simple Approach to the Costs and Benefits of a Single Currency Area.
- Source :
- Review of International Economics; Sep2003, Vol. 11 Issue 4, p674-691, 18p
- Publication Year :
- 2003
-
Abstract
- Abstract The paper evaluates the costs and benefits of a single currency area within a unified framework. Conventionally, it is argued that a single currency area carries a welfare loss owing to the sacrifice of exchange rate adjustment in the presence of country-specific shocks. But in 1973 Mundell argued that a single currency area offers risk-sharing benefits when capital markets are limited in their ability to facilitate consumption insurance. The authors construct a simple model and compare a system of independent national currencies to a single currency area. The presence of country-specific shocks may either reduce or enhance the benefits of a single currency area, depending on the importance of exchange rate adjustment relative to risk-sharing. In a simple quantitative analysis, we find that either regime may dominate, although the utility differences between the two regimes are very small. [ABSTRACT FROM AUTHOR]
- Subjects :
- MONEY
FINANCE
EXCHANGE
CAPITAL market
FINANCIAL institutions
Subjects
Details
- Language :
- English
- ISSN :
- 09657576
- Volume :
- 11
- Issue :
- 4
- Database :
- Complementary Index
- Journal :
- Review of International Economics
- Publication Type :
- Academic Journal
- Accession number :
- 10832519
- Full Text :
- https://doi.org/10.1111/1467-9396.00410