Risk Sharing and the Theory of Optimal Currency Areas: A Re-Examination of Mundell 1973

15 Pages Posted: 28 Aug 2007

See all articles by Stephen Ching

Stephen Ching

School of Economics and Finance, The University of Hong Kong

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: 2000

Abstract

Mundell (1973) argues that a common currency area provides benefits for its members by offering insurance against region-specific shocks. We develop a simple model to analyse the nature of risksharing benefits of a single currency area for emerging market economies, based on Mundell's hypothesis. An important pre-requisite for the risk-sharing benefits of a single currency is that there be limited trade among countries in national-currency denominated bonds. The evidence for emerging markets supports this assumption. In this case, we show that a single currency area may support risk sharing that could not be achieved under floating exchange rates. Based on a simple quantitative evaluation of our model, we show that the implied risk sharing can be substantial.

JEL Classification: F33, F41

Suggested Citation

Ching, Stephen and Devereux, Michael B., Risk Sharing and the Theory of Optimal Currency Areas: A Re-Examination of Mundell 1973 (2000). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 08/2000, Available at SSRN: https://ssrn.com/abstract=1009489 or http://dx.doi.org/10.2139/ssrn.1009489

Stephen Ching (Contact Author)

School of Economics and Finance, The University of Hong Kong ( email )

Pokfulam Road
Hong Kong

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada
604-822-2542 (Phone)
604-946-6271 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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