Abstract
The economic rationale of a currency union, compared to other monetary regimes, is that governments are required to tie their hands: money cannot be used as a policy instrument at a government’s discretion. However, governments also part with exchange rate policies when joining a currency union. A repegging of the exchange rate seems to be an effective measure to compensate for asymmetric shocks. Chapter 2 takes a closer look at the value of exchange rate policy and elaborates two arguments. Firstly, exchange rate policies do help against monetary shocks but not against real ones. Secondly, the flexibility of prices and wages will increase within a monetary union.
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Further Reading
Mundell, R.A. 1961. A Theory of Optimum Currency Areas. American Economic Review 51: 657–664.
McKinnon, R.I. 1963. Optimum Currency Areas. American Economic Review 53: 717–725.
———. 2004. Optimum Currency Areas and Key Currencies: Mundell I versus Mundell II. Journal of Common Market Studies 42: 698–716.
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Tomann, H. (2017). Theory of Optimum Currency Areas. In: Monetary Integration in Europe. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-59247-3_2
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DOI: https://doi.org/10.1007/978-3-319-59247-3_2
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