Income and Price Insurance Aspects of Monetary Union

34 Pages Posted: 22 Feb 2002

Date Written: February 2002

Abstract

Regional monetary union offers important income and price-level insurance to its members. The welfare gains available through the completion of financial markets from income and consumption insurance alone are especially large. They are much greater than those available from access to noncontingent international borrowing among members that may be promoted by monetary union. While insurance tackles asymmetric, and hence diversifiable, risks, the single monetary policy seeks to cushion symmetric disturbances that have a net effect on the union as a whole. Thus increased correlations among residual country disturbances are not necessary for the ex post justification of a monetary union although they remain likely because of other effects.

Monetary union also ensures low inflation and low inflation dispersion among members. Some factors making for national inflation differentials, such as entering into monetary union at an undervalued exchange rate, have only transitory effects. Other dispersion effects, such as technology catch-up of some members with others, are more persistent but correspondingly mild. Monetary union further contributes to the efficiency of international pricing by both reducing and equalizing discriminatory degrees of pricing-to-market. Beneficial effects are expected from a better balance of power between major internally integrated markets such as those of the euro area and the United States.

Keywords: monetary union, insurance, stabilization, inflation

Keywords: Monetary Union, Financial Insurance, Pricing to Market

JEL Classification: F33, F36, F41

Suggested Citation

von Furstenberg, George M., Income and Price Insurance Aspects of Monetary Union (February 2002). Available at SSRN: https://ssrn.com/abstract=300249 or http://dx.doi.org/10.2139/ssrn.300249

George M. Von Furstenberg (Contact Author)

Indiana University ( email )

Department of Economics
Wylie Hall, Indiana University
Bloomington, IN 47405-6620
United States
812-856-1382 (Phone)
812-855-3736 (Fax)

HOME PAGE: http://mypage.iu.edu/~vonfurst/

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