Optimal Payment Areas or Optimal Currency Areas?
- (pp. 505-08)
AbstractWe use the Optimal Capital Structure of Nations framework in Bolton and Huang (2018) to develop a new theory of Optimum Currency Areas. Whether two economically integrated nations should form an optimal currency area depends on a trade-off between financial flexibility (the value of monetary sovereignty) and monetary discipline (the commitment not to engage in competitive monetizations). We show that a monetary union works best when combined with a fiscal union and fiscal transfers. We also show that debt monetization is still desirable in a monetary union when both member-countries simultaneously face a negative output shock.
CitationBolton, Patrick, and Haizhou Huang. 2018. "Optimal Payment Areas or Optimal Currency Areas?" AEA Papers and Proceedings, 108: 505-08. DOI: 10.1257/pandp.20181058
- E62 Fiscal Policy
- F33 International Monetary Arrangements and Institutions
- F45 Macroeconomic Issues of Monetary Unions