A Formal Model of Optimum Currency Areas

IMF Working Papers, April 1, 1994

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A Formal Model of Optimum Currency Areas

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Bibliographic details

• Authors: Tamim Bayoumi
• Published: April 1, 1994
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451846171.001

Summary

• A model of optimum currency areas is presented using a general equilibrium model with regionally differentiated goods.
• The choice of a currency union depends upon:
  • the size of the underlying disturbances,
  • the correlation between these disturbances,
  • the costs of transactions across currencies,
  • factor mobility across regions,
  • the interrelationships between demand for different goods.
• It is found that, while a currency union can raise the welfare of the regions within the union, it unambiguously lowers welfare for those outside the union.

Key findings and conclusions

• A currency union can raise the welfare of regions within the union.
• A currency union unambiguously lowers welfare for regions outside the union.
• Determinants of the desirability of joining a currency union include:
  • size of underlying disturbances,
  • correlation between disturbances,
  • transaction costs across currencies,
  • factor mobility across regions,
  • interrelationships between demand for different goods.

Policy-relevant implications

• Evaluations of joining or forming a currency union should explicitly consider:
  • measured size and correlation of regional shocks,
  • transaction costs associated with multi-currency trade,
  • the degree of factor mobility (labor and capital) across regions,
  • demand interrelationships across regionally differentiated goods.
• Policymakers should weigh welfare gains for union members against welfare losses for non-members when assessing the broader regional consequences of monetary integration.

Publication and metadata

• Author: Tamim Bayoumi
• Date: April 1, 1994
• Also published in Staff Papers, Vol. 41, No. 4, December 1994.
• Series: Working Paper No. 1994/042
• Issue: 042
• Volume: 1994
• Pages: 22
• DOI: https://doi.org/10.5089/9781451846171.001
• Stock No: WPIEA0421994
• ISBN: 9781451846171
• ISSN: 1018-5941
• Subjects: Economic integration, Employment, Exchange rates, Foreign exchange, Labor, Labor demand, Monetary unions
• Keywords: choice of a currency union, cost t, currency union, currency union in a bloc, Employment, entrepot trade, exchange rate Ei, Exchange rates, existing currency union, Labor demand, larger currency union, Monetary unions, results from a currency union, separate currency, single currency zone, two-region currency union, union in a bloc, WP

Source: "A Formal Model of Optimum Currency Areas", Tamim Bayoumi, IMF Working Papers 1994/042.