## A Model of an Optimum Currency Area

_IMF Working Papers, June 1, 1997_

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## Bibliographic details
- Authors: Luca A Ricci
- Published: June 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451849837.001

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### Summary
- Title: A Model of an Optimum Currency Area
- Author: Luca A Ricci
- Publication date: June 1, 1997
- Type: IMF Working Paper (Working Paper No. 1997/076)
- Core question: Investigates the circumstances under which it is beneficial to participate in a currency area.

### Model and mechanisms analyzed
- Framework: A two-country monetary model of trade with nominal rigidities.
- The model encompasses the real and monetary arguments from the optimum currency area literature, specifically:
  - correlation of real shocks
  - international factor mobility
  - fiscal adjustment
  - openness
  - difference in national inflationary biases
  - correlation of monetary shocks
  - benefits of a single currency

### Key findings
- The effect of openness on net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area.
- Countries do not necessarily agree on whether a given currency union should be created.
- The paper integrates both real and monetary considerations in assessing net benefits of currency union participation.

### Policy implications and interpretation
- Cost-benefit analysis of joining a currency union must account simultaneously for:
  - real shock correlations and their cross-country covariance
  - international factor mobility (including labor mobility)
  - fiscal adjustment capacities and redistribution properties
  - monetary biases and the correlation of monetary policy shocks
  - potential benefits from adopting a single currency
- Openness should not be treated as a unambiguous criterion favoring currency union membership; policy conclusions about optimal membership depend on the full set of model parameters and the relative weight of the listed mechanisms.
- Because countries may reach different assessments of net benefits, voluntary agreement on creating a currency union cannot be assumed.

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