Abstract
Purpose When sectoral shocks hit a large, regionally heterogeneous economy, it is likely that regions with sectoral specialization will be affected in different ways. In these cases, it might be optimal for the country to decentralize the currency into a number of regional currencies, thus allowing for differentiated monetary policy. The paper aims to discuss these issues. Design/methodology/approach The author explicates the potential benefits and costs to decentralization. The author also highlights characteristics that should be satisfied in order to consider multiple currencies. This paper uses a theoretical and empirical model to test if the USA contains regional optimal currency areas. The author tests five potential divisions of the states into monetary subunions. Findings One of these divisions is proven to result in higher welfare (a 2 percent increase) than the status quo national monetary union. Thus, the USA is not an optimal currency area, and monetary decentralization could be a feasible and welfare-improving option for future policy. Originality/value There have been no previous studies of monetary divisions. Given the importance of fiscal decentralization, it is important to also understand the implications of monetary decentralization.
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