Abstract
AbstractOmitted from traditional optimal currency area criteria, price effects are important because regional monetary union protects from pricing risks and contributes to greater uniformity and efficiency in price‐setting. Among member countries it reduces price dispersion in tradeables in part by irrevocably fixing the internal exchange rate and in part by facilitating arbitrage. The larger integrated market of the euro area also encourages outside producers to engage in more ‘pricing to market’ within it. With inflation differentials in tradeables reduced throughout the euro area, systematic national inflation differentials are likely to be limited to those attributable to productivity differentials that cause differences in the inflation rate of non‐tradeables.
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