Currency Areas and International Assistance

CORE Discussion Paper No. 2007/52

28 Pages Posted: 30 Aug 2007

See all articles by Pierre M. Picard

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA); Universite du Luxembourg

Tim S. Worrall

University of Edinburgh

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

Picard, Pierre M. and Worrall, Tim S., Currency Areas and International Assistance (July 2007). CORE Discussion Paper No. 2007/52, Available at SSRN: https://ssrn.com/abstract=1010649 or http://dx.doi.org/10.2139/ssrn.1010649

Pierre M. Picard (Contact Author)

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Universite du Luxembourg

L-1511 Luxembourg
Luxembourg

Tim S. Worrall

University of Edinburgh ( email )

30 Buccleuch Place
Edinburgh, Scotland EH8 9JY
United Kingdom
(0)131 651 5128 (Phone)

HOME PAGE: http://www.timworrall.com

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