Credible Currency: A Constitutional Perspective

By contrast to private banks, public monetary authorities – central banks and currency boards – have limited credibility in making redemption or fixed-exchange-rate commitments. Their sovereign immunity obviates legal penalties for devaluing, and their monopoly status weakens reputational penalties. The softness of central bank promises invites speculative attack and currency crises. Privatization and decentralization of exchange-rate commitments provides a more credible currency by making redemption commitments legally enforceable and reputable. This contrast sheds light on (1) the breakdown of the classical gold standard and (2) the costs and benefits of dollarization. JEL Classification: E42, H42.     

Mundell Revisited: a Simple Approach to the Costs and Benefits of a Single Currency Area

The paper evaluates the costs and benefits of a single currency area within a unified framework. Conventionally, it is argued that a single currency area carries a welfare loss owing to the sacrifice of exchange rate adjustment in the presence of country‐specific shocks. But in 1973 Mundell argued that a single currency area offers risk‐sharing benefits when capital markets are limited in their ability to facilitate consumption insurance. The authors construct a simple model and compare a system of independent national currencies to a single currency area. The presence of country‐specific shocks may either reduce or enhance the benefits of a single currency area, depending on the importance of exchange rate adjustment relative to risk‐sharing. In a simple quantitative analysis, we find that either regime may dominate, although the utility differences between the two regimes are very small.     

Costs and benefits of unilateral euroization in central eastern Europe

Countries unable or unwilling to join a monetary union can replicate most membership effects unilaterally through either a currency board or the formal replacement of domestic currency by that of the Union. Potential benefits include lower transaction costs, lower interest rates, and lower exposure to speculative attacks. Costs include initial reserves, inadequate response to asymmetric shocks, loss of seigniorage, no lender of last resort. Expected costs and benefits have probably been exaggerated. Net effects depend primarily on the degree of monetary, real, and institutional convergence. Positive net advantages will accrue to countries that are either already converging, or wish to use a single currency to speed up convergence — especially if small. There is no legal or economic justification for EU aversion to unilateral euroization in accession candidate countries. JEL classification: F33, F36, E58, P33.     

Competitiveness and Exemptions From Environmental Taxes in Europe

A number of European countries have introduced a variety of environmental taxes. A common characteristic of their implementation is the inclusion of exemptions and tax relief, in particular for (some sectors of) manufacturing industry. This paper analyses the pattern and motivation of exemptions as they have developed in Western European countries, making clear the difference between the nominal and effective tax rates once the exemptions have been taken into account. The principal motivation for exemptions relates to concern about competitiveness. While particular environmentally-intensive sectors may have some grounds for concern, even these might be able to achieve cost-effective environmental improvements, such that their competitive position is not over-disadvantaged, while for an economy structured like the UK's, an environmental tax plus rebate scheme, sometimes called an ecological tax reform, would be likely to yield benefits in terms of competitiveness. The exemptions usually run counter to the environmental economic logic of using environmental taxes to internalise social costs and give economic signals that are based on the full costs of production, and they are likely to increase the costs of achieving a given level of emission reduction. With little justification for them also on the grounds of competitiveness, it would therefore be undesirable on both economic and environmental grounds for them to remain a feature of the implementation of environmental taxes in the future.     

European Monetary Integration and Aggregate Relative Deprivation: The Dull Side of the Shiny Euro

Drawing on the premise that the integration of economies revises people's social space and their comparators, we quantify social stress by aggregate relative deprivation, ARD; we calculate the effect of monetary mergers on ARD; and we document the validity of the superadditivity property of ARD for successive adoptions of a common currency by European countries. One feature of monetary unification, which replaces diverse currencies with a common currency, is that it brings about a change in the comparison environment, expanding the reference space of individuals in a given country to encompass individuals from the joining countries. Overall, calculations regarding six enlargements of the Economic and Monetary Union between 1999 and 2011 reveal an increase of ARD on six occasions when we hold incomes constant, and on five when we take into consideration changes in incomes. In addition, we observe an uneven distribution of the costs and benefits from monetary integration among the participating countries when these costs and benefits are measured in terms of ARD.     

Central banks and their banknote series: The efficiency-cost trade-off

One of the most important results of theoretical research on currency systems is that spacing denominations apart by a factor of two is better than a factor of three as this lowers the average number of notes and coins exchanged in transactions. These theoretical studies also claim that an efficient denominational mix has the additional benefit of keeping down the production costs incurred by the central bank. This paper challenges this claim and demonstrates that more efficient currency systems can also be more costly. Central banks therefore face an efficiency-cost trade-off and have to weigh the benefits for transactors against those for the central bank itself.     

Speculative attacks and defenses as wars of attrition

This paper extends the currency crisis models in Obstfeld [Obstfeld, M., 1994. The logic of currency crises. Cahiers Economiques et Monetaries], [Obstfeld, M., 1996. Models of currency crises with self-fulfilling features. European Economic Review 40, 1037–1047] by modeling both the government's side and speculators' side and introducing uncertainty about each party's payoff. We argue that a speculative attack (defense) can be well modeled as a war of attrition between the government and speculators under asymmetric information. We then solve for a pure strategy, weakly perfect, Bayesian rational expectation equilibrium in which each party's time until concession depends on her benefits from winning and her costs of fighting. Using this model, we are able to explain important facts of currency crises. First, the model shows that failed defenses (attacks) can be ex-ante rational for governments (speculators). Second, the model predicts systematic variations in the durations of defenses. Finally, we also show that currency crises can be self-fulfilling in the sense that there exist multiple rational expectation equilibria in our model.     

Branching and competition in the European banking industry

In this study branching costs and competitiveness of European banks are measured by fitting a monopolistic competition model to a representative sample drawn from nine EEC banking industries in the period from 1990 to 1996. In the theoretical model, banks decide strategically the size of their branching network anticipating the degree of competition faced on interest rates. From the structural equations of the model an econometric test is derived in order to measure branching costs and degree of competition in banking services. The empirical analysis captures their changing over time together with the impact of various European directives aiming at deregulating the banking industry. Furthermore the study shows persistence of segmentation acoss EEC banking industries.     

VEHICLE CURRENCY*

Historically, the world economy has been dominated by a single currency accepted in the exchange of goods and assets among countries. In recent decades, the U.S. dollar has played this role. The dollar acts as a “vehicle currency” in the sense that agents in nondollar economies will generally engage in currency trade indirectly using the U.S. dollar instead of using direct bilateral trade among their own currencies. A vehicle currency is desirable when there are transactions costs of exchange. This article constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency and show how it depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency’s government. We find that there can be significant welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetrically weighted toward the residents of the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle currency country.     

Exchange Market Pressure and Monetary Policy in Emerging Market Economies: New Evidence from Treatment‐effect Estimations

The way central banks react to exchange market pressure is likely to affect the subsequent economic development and the associated economic costs. In a situation of currency pressure the central bank can in principle decide to let the currency float freely, to maintain the peg or to implement a managed float policy, i.e. a mix of depreciation and intervention. As the central bank's choices are subject to self selection and endogeneity, we use propensity score matching to adequately cope with these methodical challenges. We find that monetary authorities have two options to keep down the economic costs in terms of output, namely stabilizing the exchange rate or letting the currency float freely. In contrast, a managed float under currency pressure is accompanied by the worst possible outcome with an average loss of gross domestic product (GDP) between 5% and 6%.     

Market Structure, Efficiency and Rising Consolidation of the Banking Industry in the Euro Area

Four factors are fundamentally altering the financial landscape in the Euro Area: deregulation, further disintermediation provoked by the common currency and common monetary policy, technological advances and increased competition from non‐bank intermediaries. Faced with the combined pressures of these factors, banks are devising strategies to do business in this new environment. They respond by attempting to improve their efficiency and/or market power through consolidation and balance sheet restructuring. This article examines whether the ongoing process of consolidation should be rationalized on the basis of the benefits of economies of scale and scope or to the attempt of banks to tackle excess capacity problems. Empirical findings reveal a significant effect of efficiency measures on banking profitability indices. Also, we argue that further disintermediation caused by common currency and common monetary policy poses a threat to banks' profitability. Finally, these results have some implications for merger and antitrust policy as well as for supervisory and regulatory practices.     

Single european currency: Effects on firm structure and personnel management

This paper examines the likely effects of the introduction of the single European currency, whose arrival means that the development of the economic space of the European Union will be completed. Two aspects of the forthcoming changes are analyzed. First is the process of monetary integration, which will spread over three years, and is here reviewed chronologically. Second is the final effect of this process on firms—how different company structures will adapt and what actions will have to be taken with regard to the management of human resources.     

Rethinking the costs related to global warming: A survey of the issues

One approach to the economic analysis of global warming seeks to balance the costs of damage from or adaptation to it with the costs of mitigating it. The costs of adaptation and damage have been estimated using techniques of environmental evaluation, but are subject to a wide margin of uncertainty. The costs of mitigation, principally by reducing the emissions of CO₂, have been estimated using different kinds of economic models, some of the results of which have suggested that very little abatement of carbon emissions is justified before the costs of abatement exceed the benefits of it in terms of foregone damage and adaptation costs. The paper analyses the extent to which this conclusion is a function of the modelling assumptions and techniques used, rather than likely practical outcomes, with regard to the models' treatment of unemployed resources, revenue recycling, prior distortions in the economy due to the tax system and possible dynamic effects from the introduction of a carbon-energy tax. It concludes that, with different and arguably more appropriate treatment of the above issues, especially when the secondary benefits of reducing CO₂ emissions are also taken into account, it is not clear that even substantial reductions in the use of fossil fuels will incur net costs, especially if there is the prospect of even moderate costs from global warming.     

New EU member states and the Euro: economic readiness,benefits and costs

All of the new EU member states (NMSs) have made a commitment to adopt the Euro. This essay considers the countries’ economic readiness to adopt the Euro as well as the economic benefits and costs of adoption. Paper applies a method suggested by Bayoumi and Eichengreen (1997) and finds that the changes of real effective exchange rates between the Euro area and the new EU member states follow the pattern predicted by the optimum currency area theory. This finding allows the construction of the readiness for adoption index for every NMS. The tangible benefits (for NMSs) of adoption are also examined in this essay. Analyses suggest that the costs of currency exchange and hedging against the uncertainty in foreign exchange markets account for about 0.08–0.012% of the countries’ GDP. In addition, countries that adopt the Euro might expect lower inflation and interest rates. This essay also examines the possible costs of adoption. These are in the forms of the lost ability to use monetary policy tools and set the level of seigniorage. Analysis suggests that many countries had given up their independence over monetary policy even before the accession to the EU. In addition, bigger NMSs have not used seigniorage as the source of fiscal income. However, they used exchange rate flexibility to depreciate their currencies during the recent crisis.     

Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market

The paper uses micro‐level price data from the European car market to examine why there are deviations from the law of one price. The absolute law of one price is strongly rejected, but there is convergence to its relative version. Two sets of explanations are considered: (i) price‐setting in segmented markets, and (ii) arbitrage barriers. Overall, the determinants of arbitrage costs have more explanatory power. The single most important factor is the distance between markets. Evidence for Belgium and Luxembourg suggests that a single currency lowers price differences significantly.     

Bringing Ecosystem Services into the Real World: An Operational Framework for Assessing the Economic Consequences of Losing Wild Nature

Policy action to halt the global loss of biodiversity and ecosystems is hindered by the perception that it would be so costly as to compromise economic development, yet this assumption needs testing. Inspired by the recent Stern Review on the Economics of Climate Change, the leaders of the G8+5 nations commissioned a similar assessment of the economics of losing biodiversity, under the Potsdam Initiative on Biodiversity. Here, we propose a conceptual framework for such a global assessment which emphasizes several critical insights from the environmental economics and valuation literature: contrasting counterfactual scenarios which differ solely in whether they include specific conservation policies; identifying non-overlapping benefits; modeling the production, flow, use and value of benefits in a spatially-explicit way; and incorporating the likely costs as well as possible benefits of policy interventions. Tackling these challenges, we argue, will significantly enhance our ability to quantify how the loss of benefits derived from ecosystems and biodiversity compares with the costs incurred in retaining them. We also summarise a review of the current state of knowledge, in order to assess how quickly this framework could be operationalized for some key ecosystem services.     

浅析中国外汇市场的交易机制和发展

我国的外汇市场主要指银行之间进行结售汇头寸平补的市场，就是通常所说的国内银行间外汇市场。中国当前外汇市场制度在实践中尚需要进一步改进和完善。为了加快与国际接轨的步伐以及适应经济市场化的整体要求，我国都应该进一步深化外汇市场改革。     

Monetary union in Latin America: an assessment in the context of optimum currency area

The article applies the optimum currency area (OCA) theory to Latin America to assess the potential of a monetary union in Latin America and in its major existing regional trade agreements (RTAs). According to OCA criteria we find that Latin America is far from being an optimum currency area, as its countries’ exposure to asymmetric shocks is high and their capacities to adjust in response to macroeconomic disturbances are limited. Using a panel of 20 Latin American countries from 1990 to 2014, we apply the dynamic OLS estimation techniques to estimate the costs and benefits of a potential monetary union in Latin America and in its various RTAs. to estimate the costs and benefits of a potential monetary union in Latin America and in its various RTAs. We find that the costs are high, because Latin America’s economies are vulnerable to severe macroeconomic disturbances and its RTAs differ significantly in their response to negative demand shocks. Most of the monetary efficiency gains are shown to be the result of a common restrictive monetary policy which would result in higher FDI inflows and, to a more limited extent, increased GDP, both overall and per capita. Although Central American countries are shown to be most suitable for further monetary integration, we conclude that Latin American countries should head first towards greater economic and political integration.     

On the welfare benefits of an international currency

Is it beneficial for a country's currency to be used internationally? And, if so, can we quantify the benefit? Since the emergence of the euro, there has been great interest in the consequences of a transfer of the dollar's premier international role to the euro. This paper presents a novel model-based approach towards assessing the welfare benefits associated with the international use of a country's currency. Apart from the familiar benefits associated with seigniorage, residents of the issuing country experience an increase in the purchasing power of their currency both at home and abroad. In the calibration exercise carried out in this paper, we find the benefits of an international currency to be quantitatively significant. The welfare gain for the Euro area in having the euro internationally used ranges from 1.9% to 2.3% of consumption depending on relative inflation rates. The rest of the world is not indifferent as to which currency circulates as the dominant international currency. Conditional on their currency not being used internationally, their preference is for the dominant international currency to be the one with the lowest inflation rate.     

Capital Market Integration in Euroland: The Role of Banks

The introduction of the euro marks a milestone in the process of European financial market integration. This paper analyzes the implications of the euro for cross-border banking activities. A portfolio model is used which captures the role of banks as providers of informational and of risk-diversification services. By eliminating exchange rate risks, the euro enhances the incentives of banks to expand within Euroland. Yet, while the currency bias in bank portfolios will be eliminated, the home bias will remain. Implications of market integration for the risk-taking and the monitoring of banks are not clear-cut.