Premium
Commitment and the adoption of a common currency*
Author(s) -
Cooper Russell,
Kempf Hubert
Publication year - 2003
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.t01-1-00064
Subject(s) - economics , currency , inflation (cosmology) , monetary economics , common currency , incentive , international economics , currency union , pareto principle , macroeconomics , microeconomics , operations management , physics , theoretical physics
In contrast to Mundell's inquiry on the optimality of currency areas, this article aims to understand under what circumstances a Pareto‐dominant monetary union will be established. Using a multicountry overlapping generations model, we highlight gains from monetary union arising from reduced transactions costs and lower inflation. Despite these gains, countries acting independently will impose barriers to exchange through local currency restrictions, thereby creating transactions costs and providing an incentive for inflation. Therefore, the gains from monetary union are most likely to be lost without collective effort.