Optimal Currency Areas and Customs Unions: Are They Connected?

Bank of England Working Paper No. 89

49 Pages Posted: 7 Apr 1999

See all articles by Marion Kohler

Marion Kohler

Bank for International Settlements (BIS)

Date Written: 1998

Abstract

This paper examines the link between currency areas and customs unions. The size of a bloc of countries practicing some form of co-ordination of monetary policy is limited by the incentive to free-ride that formation of the bloc creates. However, when the threat of a trade war is introduced, the stable size of the bloc increases. This suggests that a large currency area is more likely to emerge where it combines with a customs union, and that the stability of both currency area and customs union are closely related, because the threat of tariff penalties can enforce co-operation.

JEL Classification: F33, F42

Suggested Citation

Kohler, Marion, Optimal Currency Areas and Customs Unions: Are They Connected? (1998). Bank of England Working Paper No. 89, Available at SSRN: https://ssrn.com/abstract=143235 or http://dx.doi.org/10.2139/ssrn.143235

Marion Kohler (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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