Optimal currency area theory and monetary integration in the Andean and Caribbean regions

In this article, the author analyses the prospects for monetary integration in the Andean and Caribbean regions and stresses the regional specificities that should be taken into account. He points to the necessity to combine economic, political economy and institutional approaches to assess scenarios for monetary integration. The author also argues that the application of optimum currency area theory to regions with specific characteristics (in many respects different from the EU) might produce positive feed‐back effects for the development of OCA theory itself, highlighting specific aspects and implications of the same theory and stimulating theoretical research.     

Currency Areas and Equilibrium

The standard approach to optimum currency areas clashes with both modern monetary theory and empirical evidence. The present paper sets forth an equilibrium hypothesis that views the national border as the analogue of a policy measure impinging on agents' optimizing behavior.     

Monetary Integration In Eastern And Southern Africa: Choosing A Currency Peg For Comesa

African countries involved in monetary integration projects have been advised to peg their currencies against an external anchor before the definite fixing of exchange rates. In this study, we estimate optimum currency area indices to determine, between four alternatives, which international currency would be the most suitable anchor for Common Market for Eastern and Southern Africa (COMESA) members and for a set of other selected African economies. We conclude that the euro and the British pound prevail over the US dollar or the yen; that the euro would be the best pegging for most, but not all, COMESA members; and that some of these economies display evidence of more intense integration with third countries, with which they share membership in other (overlapping) regional economic communities, than within COMESA.     

Conditions for Optimality of a Currency Area

Two approaches to the theory of OCA are distinguished in this paper. The first, called the marginalistic approach, attempts to define the OCA from the point of view of a single country, and the second examines the optimality of a currency area of a given membership. The marginalistic approach and its limitations are discussed first. Then, the paper proceeds to the second approach which is discussed in the context of the cooperative game theory in characteristic function form; it argues that a currency area is optimal when the welfare functions of its constituent members are in the core. This implies that the welfare functions of all constituent members of the currency area are maximized and hence they are all better off with a common currency rather than with their own national currencies; hence, no member country has the intention to abandon the currency area. The paper concludes that the condition for the optimality of a currency area independently of the degree of economic similarity of its constituents requires that the characteristic function must exhibit non decreasing returns with respect to its size.     

Is a Common Currency Area Feasible for East Asia? A Multivariate Structural Vector Autoregression Approach

In this paper the feasibility of forming a common currency area in East Asia is investigated. A three‐variable structural vector autoregression model is used to identify three types of shocks: global, regional and domestic shocks. The empirical results show that in the post‐crisis period the importance of asymmetric domestic shocks has declined sharply, whereas that of symmetric global and regional shocks has increased. Furthermore, although a ‘prevalent shock’ cannot be uniquely defined, most East Asian economies respond to global and regional shocks in a symmetric way. Although the findings do not provide strong support for forming a common currency area in this region at the current stage, they suggest that most East Asian economies have become relatively symmetric in terms of economic shocks and adjustments, implying that a common currency area might become viable through deepening regional integration.     

The theory of optimum currency areas,trade adjustment,and trade

This article seeks to provide a closer integration of the theory of optimum currency areas with the theory of international trade. A currency area is treated as a continuous variable ranging from zero to one: zero if there is no enlargement, and some positive value otherwise, corresponding exactly to the percentge of trade in the enlarged area. The benefits of widening a currency area are then regarded, in terms of conventional trade theory, as equivalent to a reduction in transportation cost. The costs of widening a currency area are seen, instead, with reference to open economy macroeconomics, as a drop in the speed of adjustment of the terms of trade to their long-run equilibrium level. On this basis, it is shown that the marginal benefits of enlarging a currency area fall, the marginal costs rise, and an optimum size arises. But this size depends heavily on the optimal composition of the members.CEPR     

Monetary Union,Trade Integration,and Business Cycles in 19th Century Europe

This paper studies the impact of monetary arrangements on trade integration and business cycle correlation in late 19th century Europe. We estimate a gravity model and show that tighter monetary integration was associated with substantially higher trade, as in recent studies using contemporary data. For instance, the Austro-Hungarian monetary union improved trade between member states by a factor of 3. To explain this, we build and estimate a simple model where greater monetary integration weakens the current account constraint by fostering business cycle co-movements.     

Endogenous Symmetry of Shocks in a Monetary Union

The monetary union issue, when assessed with the traditional inferences for optimal currency areas, misses an important dimension. Increased specialisation induced by reduced transaction costs, suggested by Krugman's lessons of Massachusetts, is only a part of the story. Even if agglomeration and inter-industry trade may occur as a result of reduced transaction costs, this tendency may be counteracted by the elimination of uncertainty associated with bilateral exchange rate variability within the monetary union.Thus, in contradiction to what is generally assumed on the basis of the reduction in transaction costs only, the European Monetary Union (EMU) is likely to foster intra-industry trade in Europe, leading to more symmetric shocks between member states. The monetary union will endogenously create the conditions of its success. Empirical evidence is provided for EU countries' bilateral trade over the period 1980–1994, using disaggregated trade data.     

A suggested reformulation of the theory of optimal currency areas

In contrast to conventional analyses of monetary union between two particular countries or sets of countries, this paper treats the possible expansion of a given currency area as a continuous variable ranging from zero to one; zero if there is no expansion and one if all sources of imports and competition in trade are included in the union. The optimal order in which new members are admitted to the union then becomes a central aspect of the problem. Along with other advantages, this approach makes it easier to defend the argument that many nations are too small for form optimal currency areas. The demands upon the origin of the shocks, factor mobility, and political organization are smaller.     

Exploring the Case for Monetary Integration between the Chinese Mainland and Hong Kong

This paper presents an empirical investigation on an important policy issue, namely, whether there is any evidence supporting monetary integration between the Chinese mainland and Hong Kong. We follow two lines of inquiry. First, we present a series of simple tests to find the extent to which trade and/or financial linkages exist between the two regions. Second, we use simple inflation and output differentials and structural VAR techniques to test for the degree of business cycle synchronization between the two regions. The results indicate that there is evidence supporting the existence of trade linkages and that there is also support for the possible synchronization of business cycles. We discuss the implications of this for monetary integration between Hong Kong and the mainland.     

Vehicle currency pricing and its positive welfare consequences under optimal monetary policy

Using a two-country general equilibrium model, this paper analytically derives the possibility of positive welfare consequences of vehicle currency use in invoicing international trades. Such vehicle currency use is prominent in the data. The literature points out welfare loss under optimal monetary policy due to vehicle currency pricing relative to the flexible price equilibrium outcome, modeling only tradable goods. By introducing nontradable goods and their sector-specific productivity shocks, this paper provides a closed-form condition under which one country's welfare is higher under optimal monetary policy if its exports are invoiced with the other country's currency than if invoiced with its own currency, given that the other country's exports are invoiced with the producer's currency. That is, this paper derives a condition under which vehicle currency pricing is preferred by the nonvehicle currency country to producer currency pricing.     

The spill over effects of monetary policies and the welfare effects of the currency appreciation in an open economy -A simple discussion

Based on new open-economy macroeconomics, this paper provides simple discussions about the equilibrium conditions of labour market, goods markets and money market in a two-country world model economy. Given one-period wage sticky assumption, the following conclusions are obtained, the monetary policy can impact labour supply and thereby the equilibrium of labour market in the short run; The spill over effect of monetary policy in home and foreign countries implies an important international transmission channel in terms of equilibrium relationships between home and foreign countries, which also demonstrates the welfare effects of currency appreciation.     

Fiscal policy in monetary unions: Implications for Europe

This paper analyzes how the feasible mix of government expenditure and financing arrangements may change with the establishment of a monetary union such as that planned by members of the European Community. We find that a monetary union reduces the feasible divergence across countries in their present discounted levels of fiscal spending. Wide differences across countries in their present and future time patterns of spending are still possible, however. Examination of the empirical evidence suggests that the movement toward greater exchange rate fixity associated with the EMS and participation in quasi monetary unions havenot been accompanied by significant fiscal convergence. The experience of member states of several existing monetary unions, however, suggests that a more effective constraint to budgetary discipline arises within full-fledged unions in operation over long periods, even in the absence of binding central rules on government deficit and debt positions.     

加强我国公司法人治理结构中的激励与约束机制

本文利用相关分析、Granger因果检验、回归分析三种统计指标分析了CPI与GDP的关系 ,指出CPI作为通货膨胀指标的可行性。要实现CPI的控制目标 ,应以M 2作为货币政策中介目标较为合理     

我国货币供给内生性的理论分析与实证检验

我国货币政策失效的根本原因在于货币供给是内生的,而不是中央银行可以控制的外生变量。本文在回顾内生货币理论发展历程的基础上,从基础货币与货币乘数两个方面论述了我国货币供给内生性的历史演变和作用机理,并用向量自回归模型对货币供应量与国内生产总值的格兰杰因果关系     

Uncovered interest rate parity and analysis of monetary convergence of potential EMU accession countries

This paper analyzes deviations from uncovered interest rate parity which are interpreted as indicator of the substitutability of currencies. Backward recursive statistical tests and error correction models are applied to study the co-movement of interest rates, and rolling regressions are used to study size and volatility of country specific risk premiums. In accordance to their degree of monetary integration with the Euro area, new EU members and accession countries are divided into three groups. Estonia and Lithuania seem to exhibit the highest degree of monetary integration with the Euro area.I thank Carsten Trenkler, Jürgen Wolters and two anonymous referees for helpful comments. The paper has also benefited from discussions with participants of the joint econometrics seminar of Humboldt-Universität zu Berlin and Freie Universität Berlin and of the Econometric Society European Meeting 2004 in Madrid. Financial support from the Deutsche Forschungsgemeinschaft (SFB 373, TP C3) is gratefully acknowledged.     

Paradoxes in integration theory

This paper presents a formal analysis of how global welfare is affected by changing tariff and subsidy rates. The discussion stresses three types of reform whereby, surprisingly, trade liberalization has the potential to reduce world welfare: a multilateral equi-proportionate reduction of tariffs and subsidies; a reduction of a tariff or subsidy rate which is not extreme; and the formation of a customs union.     

分析中国货币政策的有效性

我国货币政策的最终目标是稳定币值,促进经济稳定增长。中央银行是通过货币政策工具控制和调节中介目标———货币供应量来实现这个最终目标的。本文通过探讨货币是中性还是非中性,货币供应量是内生还是外生,我国货币政策的传导机制是否畅通这三个问题,最终得出了我国货币政策     

Fear of Floating Needn't Imply Fixed Rates: An OCA Approach to the Operation of Stable Intermediate Currency Regimes

The criteria of the theory of optimum currency areas suggest that many countries are not good candidates for either of the poles of genuinely fixed exchange rates or freely floating exchange rates. Thus, many countries should have an interest in intermediate exchange rate regimes. However, in a world of substantial capital mobility most forms of intermediate exchange rate regimes have proven to be highly crisis prone. This essay argues that the unholy trinity paradigm doesn't imply that intermediate exchange rate regimes are inherently unstable, but rather that exchange rate and monetary policies need to be jointly determined. The difficulties of maintaining such consistency are as much political as economic since temporarily pegged or managed rates create a time inconsistency problem. It is argued that OCA theory provides the framework for determining the appropriate weights and limits on the amount of sterilized intervention to maintain the consistency between exchange rate and monetary policies necessary to avoid currency crises. The paper also considers a number of the issues involved in integrating this approach with the literature on open economy aspects of inflation targeting.