## A Formal Model of Optimum Currency Areas

_IMF Working Papers, April 1, 1994_

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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

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/a-formal-model-of-optimum-currency-areas-1249_