Currency Choices in an Interdependent World: Lessons from Countries In and Out of the Euro

Abstract

Interdependence, that is, outcomes depending on what is done by more than one actor, is a fact of life for central banks, reflecting domestic and international pressures, both political and economic. National economies have become increasingly internationalized through trade in goods and services and in currencies too. In consequence, the economies of large as well as small countries are now shaped by actions abroad as well as by decisions at home. While interdependence is a fact of life, what governments do about it depends on political choices, and countries differ in their commitment to a national currency. Their choices are to: maintain a degree of institutional independence with a national currency subject to the vicissitudes of the international economy; join a currency union, as twelve countries of the European Union have done; or contemplate doing the latter while still pursuing the former policy, as Britain and Sweden are currently doing.