## Transcript of Economic Forum -- One World, One Currency: Destination or Delusion? November 8, 2000

_IMF News, November 8, 2000_

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## Bibliographic details
- Published: November 8, 2000

---

### Event, agenda, and participants
- Date: November 8, 2000
- Forum format: each speaker invited to speak for 15 to 20 minutes; general discussion and audience Q&A followed
- Panelists and roles:
  - Alexander Swoboda — Moderator, Senior Policy Advisor, IMF Research Department
  - Maurice Obstfeld — Professor of Economics, University of California at Berkeley
  - Paul Masson — Senior Advisor, IMF Research Department
  - Robert Mundell — 1999 Nobel Laureate and Professor of Economics, Columbia University (arrived late; remarks delivered)
- Context highlighted: creation of the euro (11 legacy currencies at launch) as motivating the forum

### Optimal currency area (OCA) framework and theoretical findings
- Mundell’s OCA tradeoff: benefits of a single currency (reduced transaction costs, reduced uncertainty, network externalities) versus loss of exchange rate-based adjustment to idiosyncratic shocks
- Key theoretical extensions and considerations raised:
  - McKinnon (1963) insight: highly open economies with flexible wages/prices already have limited monetary autonomy
  - Endogeneity considerations (Krugman): currency union may increase regional specialization and economies of scale, potentially increasing vulnerability to region-specific shocks
  - Capital mobility effects:
    - FDI-style capital mobility can exacerbate a region-specific negative shock via capital outflows (Corden)
    - Other capital flows and asset-market completeness can provide international risk-sharing that reduces the need for exchange rate adjustments
  - Labor mobility: emphasized as central to internal adjustment in large currency unions (U.S. example)
  - Fiscal federalism: public fiscal transfers can substitute for incomplete private asset-market risk-sharing (Kenen, Masson)

### Empirical observations and debate about trade and transaction-cost gains
- Empirical claims cited:
  - Study evidence that two Canadian provinces may trade as much as 20 times as much as a Canadian province with a U.S. state, controlling for other factors
  - Andy Rose's finding that two countries in a currency union trade three times more than two otherwise similar countries that do not share a currency
- Panel reactions:
  - Obstfeld and Masson urge caution: some of the measured large effects may be driven by very small countries in the samples; potential omitted variables (common language, regulations) may explain much of the observed trade premium

### Euro experience and within-union divergence
- Euro cited as a live case where single monetary policy may not fit all members:
  - Within the euro zone, inflation and output outcomes have diverged since the euro launch
  - Specific example: Ireland’s inflation "edging 4 percentage points above the average of the three lowest" (relative to Maastricht criteria); Portugal and Spain "heading up to the limit point"
- European benefits noted:
  - Credibility from fixed exchange rates has reduced speculative intra-European capital movements
  - Creation of a deeper, larger European capital market
- Political constraints and accountability concerns: Danish "No" vote and UK political hesitancy (Blair Government views) illustrate political limits to deeper monetary union

### Credibility, pegging, currency boards, and dollarization
- Credibility/importing low inflation: a late-20th-century rationale for pegging or adopting another currency
- Country-level choices illustrated:
  - Argentina’s currency board/dollar link provided credibility but limited policy flexibility and exposed Argentina to idiosyncratic shocks
  - Mexico’s 1954–1976 fixed exchange rate episode described as a period during which Mexico “had the rate of inflation of the United States” (22 years)
- Currency boards and IMF interaction:
  - Mundell expressed disappointment with IMF stance toward currency boards and argued currency board-style arrangements are analogous to classical gold-standard discipline
  - IMF policy tools (money-base targeting) criticized in the Indonesian context as potentially inappropriate for countries beyond hyperinflation episodes

### Technology, globalization, and changing roles of money (Masson)
- National roles of money: means of payment, store of value, unit of account
- International roles of money: invoicing, denominating assets/liabilities, reserves, vehicle for FX transactions, anchor for other countries’ monetary policies
- Technological and financial changes noted:
  - Multinationals report in multiple currencies; currency swaps and derivatives transform denomination and hedge risk
  - E-banking/internet payments may enable cross-border payments outside traditional banking rails
  - Prices potentially quoted in multiple currencies with continuous updates
  - Clearing and settlement increasingly run by private institutions; central bank balances may be less central to daily settlement
- Implications:
  - Payments increasingly beyond direct central bank control
  - Greater scope for competing moneys and private choice of currency (network externalities may favor dominant currencies)
  - Reduced scope for monetary independence may make countries more willing to give up national currencies if a dominant currency offers purchasing-power stability
  - Countervailing force: national/regional currencies remain potent symbols of sovereignty; separation of money roles may facilitate coexistence of multiple currencies within a jurisdiction

### Scenarios for global monetary arrangements and Mundell’s proposals
- Short- to medium-term scenario (Obstfeld / Masson):
  - Smaller countries may choose currency board, euro-ization, or dollarization
  - Larger countries may continue to float
  - Major currency areas (dollar zone, euro zone, yen zone) coexist with occasional coordination or intervention
- Mundell’s multi-step proposal for large-currency-area coordination:
  - Focus on currency areas (zones of fixed exchange rates) rather than literal single world currency
  - Possible anchors:
    - Gold (requires institutional stabilization authority)
    - Indexed SDR (virtual common currency)
    - Dominant currencies/major powers coordinating (G-3: dollar, euro, yen)
  - Specific Mundell suggestion:
    - Lock exchange rates among the three largest currency areas (U.S. dollar area GDP "$10 trillion"; euro area GDP "$7 trillion"; yen area GDP "$5 trillion")
    - Form a pooling/coordination body (open market committee equivalent) to set common monetary policy and a common inflation target
    - Eventually mesh this G-3 coordination with an SDR-based or broader international unit of account
  - Political feasibility caveats:
    - U.S. likely initially resistant to conceding monetary sovereignty
    - Political will is central—EMU arose in part from political stimulus (German unification cited)

### Regional considerations and development contexts
- Africa: historical interest in a common African currency area noted (Mundell); practical anchor problem highlighted—no dominant African economy; a G-3-basket anchor or SDR-like anchor would be required
- Asia: political and structural constraints on emergence of a regional currency bloc:
  - Japan is large now but China may overtake it; renminbi needs convertibility and modern financial infrastructure before it could play a regional anchor role
- Latin America: examples show trade integration can be strong without currency union (Canada and Mexico with the U.S. as examples)

### Policy recommendations and implications raised by speakers
- When forming a currency area (lessons from Europe):
  - Establish a common target for monetary policy (e.g., inflation target) and a harmonized measure of inflation (EUROSTAT/HICP analogue)
  - Lock exchange rates and create a unified decision-making authority for monetary policy
  - Negotiate seigniorage-sharing arrangements
- For countries considering pegging, currency boards, or dollarization:
  - Consider tradeoffs between credibility gains and loss of monetary adjustment instrument
  - Recognize role of capital mobility and type of capital flows in determining benefits and risks
  - Use IMF and international facilities to address temporary, reversible shocks that fixed regimes may otherwise aggravate (panel debate about IMF readiness and policy prescriptions)
- For the international community:
  - Explore incremental, politically feasible steps toward greater coordination among major currency areas (e.g., G-3 coordination, indexed SDRs)
  - Monitor technological change that may reduce the centrality of state-issued currency and expand private choice of currency

### Key figures and exact phrasings preserved from the proceedings
- Speaker time allocation: "15 to 20 minutes"
- Expected late arrival: "20 to 30 minutes" (Mundell initially expected)
- Euro launch context: "11 national currencies" converted into single euro currency area at inception
- Historical Mexican peg period: "1954 until 1976" (22 years)
- Trade elasticity/empirical claims:
  - Canadian provinces vs. U.S. states: "20 times as much"
  - Andy Rose result: currency union pairs trade "three times more" than otherwise similar country pairs
- GDP figures cited for major currency areas: "$10 trillion" (U.S. dollar area), "$7 trillion" (euro area), "$5 trillion" (yen area)
- Inflation divergence example: Ireland "edging 4 percentage points above the average of the three lowest"
- Numeric pricing examples Mundell used illustratively: "100 yen equals a dollar" and "one euro equals a dollar"

*Transcript of Economic Forum -- One World, One Currency: Destination or Delusion? November 8, 2000 (IMF).*

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## References

- [Argentina and the IMF](http://www.imf.org/external/country/ARG/index.htm)
- [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)
- [Canada and the IMF](http://www.imf.org/external/country/CAN/index.htm)
- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [France and the IMF](http://www.imf.org/external/country/FRA/index.htm)
- [Indonesia and the IMF](http://www.imf.org/external/country/IDN/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [Luxembourg and the IMF](http://www.imf.org/external/country/LUX/index.htm)
- [Mexico and the IMF](http://www.imf.org/external/country/MEX/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Gold in the IMF -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2022/gold-in-the-imf)
- [Special Drawing Rights (SDRs) -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/special-drawing-rights-sdr)
- [Transcripts](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/54/tr001108_