Benefits Of Monetary Union Research Articles

Should African Monetary Unions Be Expanded? An Empirical Investigation of the Scope for Monetary Integration in Sub-Saharan Africa

This paper develops a cost–benefit analysis of monetary integration and applies it to the currency unions being actively pursued in Africa. While many related studies have highlighted the problems associated with shock asymmetries, very few analyses have attempted to weigh these against potential benefits. In our model, the benefits of monetary union come from a more credible monetary policy and a correspondingly lower inflationary bias, while the costs derive from both output shock asymmetries (which are identified with different terms of trade movements) and fiscal disparities. Using African data, we estimate key equilibrium relationships of the model. These capture quite well the cross-country variation in inflation and fiscal revenues, allowing us to calibrate the full model. The model simulations indicate that the proposed East African Community, Economic Community of West African States and Southern Africa Development Community monetary unions bring about net benefits to some potential members, but that many other prospective members record relatively modest net gains and sometimes net losses. The paper also discusses how strengthening domestic monetary and fiscal institutions is an alternative that can provide some of the same benefits of monetary unions and therefore reduce their relative attractiveness.

Should African Monetary Unions Be Expanded? An Empirical Investigation of the Scope for Monetary Integration in Sub-Saharan Africa

This paper develops a full-fledged cost-benefit analysis of monetary integration, and applies it to the currency unions actively pursued in Africa. The benefits of monetary union come from a more credible monetary policy, while the costs derive from real shock asymmetries and fiscal disparities. The model is calibrated using African data. Simulations indicate that the proposed EAC, ECOWAS, and SADC monetary unions bring about net benefits to some potential members, but modest net gains and sometimes net losses for others. Strengthening domestic macroeconomic frameworks is shown to provide some of the same improvements as monetary integration, reducing the latter’s relative attractiveness.

Should African Monetary Unions be Expanded? An Empirical Investigation of the Scope for Monetary Integration in Sub-Saharan Africa

This paper develops a full-fledged cost-benefit analysis of monetary integration, and applies it to the currency unions actively pursued in Africa. The benefits of monetary union come from a more credible monetary policy, while the costs derive from real shock asymmetries and fiscal disparities. The model is calibrated using African data. Simulations indicate that the proposed EAC, ECOWAS, and SADC monetary unions bring about net benefits to some potential members, but modest net gains and sometimes net losses for others. Strengthening domestic macroeconomic frameworks is shown to provide some of the same improvements as monetary integration, reducing the latter’s relative attractiveness.

Mexico in NAFTA: Welfare Dissipation Due to Lack of a Common Currency

Except perhaps for the lead countries of global finance that may maintain a useful degree of monetary independence from each other, joining a regional monetary union boosts financial development. It enhances liquidity and depth of financial markets through the provision of sound money used over a wide area and provides implicit insurance against macroeconomic risks. This paper shows that, for Mexico unlike Canada, macroeconomic volatility is much greater during periods when the nominal exchange rate with USD changes appreciably than when it is quasi-pegged. This finding suggests that the benefits of monetary union are greatest for emerging-market countries inside an economically integrating region.

Mexico in NAFTA: Welfare-Benefit Dissipation Due to Lack of a Common Currency

Except perhaps for the lead countries of global finance that may maintain a useful degree of monetary independence from each other, joining a regional monetary union boosts financial development. It enhances liquidity and depth of financial markets through the provision of sound money used over a wide area and provides implicit insurance against macroeconomic risks. This paper shows that, for Mexico unlike Canada, macroeconomic volatility is much greater during periods when the nominal exchange rate with USD changes appreciably than when it is quasi-pegged. This finding suggests that the benefits of monetary union are greatest for emerging-market countries inside an economically integrating region. The study uses PPP-GDP data per person and per workhour from the Groningen (Netherlands) Growth and Development Centre.

Monetary Policy and the Financial Accelerator in a Monetary Union

In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.

Monetary Policy and the Financial Accelerator in a Monetary Union

In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.

The Economics of Monetary Integration.

This textbook on monetary integration, now in its third edition, has been fully revised and updated to take account of the recent important economic and political changes in the EMS, including new empirical evidence and coverage of further theoretical developments. Focusing on the economic theory of monetary union, Professor De Grauwe evaluates the costs and benefits of monetary union and the current possibilities of moving towards a single currency.

ON THE POSSIBLE COSTS OF EUROPEAN MONETARY UNION

Much has been written about the benefits of monetary union in Europe, but little about the possible costs. This paper use s a small simulation model to analyze the costs and best design for EMU. The authors find demand/supply asymmetries cause inflation, output losses and extra adjustment costs. Price stability requires tougher monetary controls, while output stability is critically dependent on active (and coordinated) fiscal policies. Thus the key is to increas e the effectiveness of existing policies. EMU itself adds very little since exchange rate stability cannot guarantee either price or outpu t stability. Relative price discipline is achieved at the expense of output stability and absolute price discipline. Copyright 1993 by Blackwell Publishers Ltd and The Victoria University of Manchester