from IV - EMU: The road from Maastricht
Published online by Cambridge University Press: 04 August 2010
Introduction
The theory of optimal currency areas seeks to determine the optimal geographical domain of a currency. The theory of fiscal federalism seeks to determine the optimal regional organization of government within the boundaries of a geographical area. The former starts from the presumption that one money, administered by a single monetary authority, should circulate in a region. The latter holds that the authority over fiscal policy should be divided between governments of various regional levels, each with its own functions and responsibilities. Thus, the theory of optimal currency areas embodies a paradigm of centralizing policy functions, fiscal federalism embodies a paradigm of decentralized government.
The modern version of the theory of optimal currency areas lists a variety of criteria for choosing the size of a currency area or monetary union. In a nutshell, the benefits from monetary union result from the lower costs of transactions in international trade with one money or completely fixed exchange rates, from the implementation of a common monetary policy in response to exogenous shocks, and, provided that the institutional design of the monetary union's central bank is right, from a more credible central bank commitment to price stability. The main costs associated with monetary union result from the loss of the exchange rate as an instrument of macroeconomic adjustment. These costs will be small, if the size of transitory, country-specific shocks within the union is small compared to common shocks and permanent shocks, if capital and labor mobility are high within the union, and if the majority of the members' trade occurs with other members of the monetary union.
To save this book to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
Find out more about the Kindle Personal Document Service.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.