Income and Price Insurance Aspects of Monetary Union
34 Pages Posted: 22 Feb 2002
Date Written: February 2002
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: Suggested Citation