The Euro E Opial Currency Areas ( σ ( r The Euro is an exaple of a currency union. The naions abandoned independen oneary auhoriy o ge a coon currency. Lecures in Macroeconoics- Charles W. Upon Opial Currency Area The Euro The Euro is an exaple of a currency union. The naions abandoned independen oneary auhoriy o ge a coon currency. Bu how big? How any naions should join? The Proble Suppose he ciy of en had is own currency (en $, or $ and is own oneary auhoriy. The exchange rae agains oher currencies (such as avenna dollars, $, floas Opial Currency Area 3 Opial Currency Area The Proposal Should he ciies of en and avenna erge heir currencies and creae a coon currency, $? The Proposal Should he ciies of en and avenna erge heir currencies and creae a coon currency, $? If hey do, here will be a single oneary auhoriy which will deerine he opial oneary policy for he en-avenna econoy. Opial Currency Area 5 Opial Currency Area 6
Advanages A single currency will ean lower ransacions coss in so any ways. Persons in avenna can rade in en wihou having o worry abou exchange flucuaions and wihou having o exchange $ for $ And vice versa. Advanages Invesors in he en-avenna can inves wih reduced worries abou exchange rae flucuaions. Or alernaively: projecs in en and avenna can arac ou of area invesen wihou having o guaranee invesors agains exchange rae flucuaions. Opial Currency Area 7 Opial Currency Area 8 Disadvanages igh now he en oneary auhoriy ses he rae of oneary expansion a, he opial rae for en. Dio, in avenna where. A single oneary auhoriy will se ( + ( + Opial Currency Area 9 Opial Currency Area 0 ( ( + Opial Currency Area ( + ( ( ( Opial Currency Area
Soe Analysis The opial oneary policy a ie is Soe Analysis ε ~ N(0, σ Opial Currency Area 3 Opial Currency Area Soe Analysis The opial oneary policy a ie is Soe Analysis ε ~ N(0, σ Opial Currency Area 5 Opial Currency Area 6 ( ( ε ( Assue ( Assue σ σ ε Opial Currency Area 7 Opial Currency Area 8
E ( + σ cov( ε, ε σ ( r ( r, no cos fro erging E + σ cov( ε, ε σ ( r Opial Currency Area 9 Opial Currency Area 0 ( r 0, a cos fro erging E + σ cov( ε, ε σ ( r The Theore There are gains in lower ransacions coss. Bu, if he wo econoies are independen, here will be a loss fro having a oneary auhoriy ha is focused on he local area. The agniude of he loss depends on he degree of independence Opial Currency Area Opial Currency Area The Tradeoff Wes Backwaer N N Wes Backwaer wans o join eiher he US dollar or he Euro. Gains in ransacions coss bu wha abou deviaions fro oneary policy? WB ciizens do no voe in Aerican elecions and will ge no say in FOMC. Opial Currency Area 3 Opial Currency Area
Wes Backwaer Do hey do ore rading wih EMU or wih US? If US, use dollar. If EMU use Euro. The Unied ingdo The U does ore rading wih he EMU han wih he US. Thus if hey wan o join, hey should EMU bu no use US $. Unlike Wes Backwaer, hey can ge a sea on he board of he European Cenral Bank. Opial Currency Area 5 Opial Currency Area 6 Canada If hey wan o join, hey should use US $. Bu i sees unlikely ha we would give Canada a sea on he FOMC. And hey ay be large enough ha here are no gains in ransacions coss. Ecuador No hope of a sea on FOMC. Bu no one had confidence in doesic oneary policy. Opial Currency Area 7 Opial Currency Area 8 End 005 Charles W. Upon. All righs reserved Opial Currency Area 9