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

14 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)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2000

Abstract

This paper develops an analytical model to evaluate the costs and benefits of a single currency area within a unified framework, inspired by the separate arguments of Mundell (1961) and (1973). The more familiar argument is that, in the presence of country-specific shocks, a single currency area imposes a welfare cost associated with the lack of exchange rate adjustment. But Mundell (1973) argues that a single currency area offers risk-sharing benefits in the face of country-specific shocks and restricted ability for capital markets to facilitate consumption insurance. In our model, a single currency area, as compared with a system of national currencies and floating exchange rates, brings both welfare costs associated with the absence of exchange rate adjustment and welfare benefits associated with risksharing. The model provides a utility-based comparison of costs versus benefits. While theoretically, either monetary regime may dominate, quantitatively, the net welfare benefits of a single currency area are likely to be negative.

JEL Classification: F33, F41

Suggested Citation

Ching, Stephen and Devereux, Michael B., Mundell Revisited: A Simple Approach to the Costs and Benefits of a Single Currency Area (November 2000). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 09/2000, Available at SSRN: https://ssrn.com/abstract=1009494 or http://dx.doi.org/10.2139/ssrn.1009494

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 )

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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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