Currency Areas and International Assistance
CORE Discussion Paper No. 2007/52
28 Pages Posted: 30 Aug 2007
Date Written: July 2007
Abstract
This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.
Keywords: Monetary Union, Currency Areas, Fiscal Federalism, Limited Commitment, Mutual Insurance
JEL Classification: F12, F15, F31, F33
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States
-
Regional Nonadjustment and Fiscal Policy: Lessons for Emu
By Maurice Obstfeld and Giovanni Peri
-
Regional Risksharing and Redistribution in the German Federation
By Ralf Hepp and Jürgen Von Hagen
-
By Tamim Bayoumi and Paul R. Masson
-
Regional Income Redistribution and Risk Sharing How Does Italy Compare in Europe?
-
Monetary Policy in an Emerging European Economic and Monetary Union: Key Issues