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Currency Unions and International Assistance
Picard, Pierre M.; Worrall, Tim


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Keywords :
Monetary union; currency areas; fiscal federalism; limited commitment; mutual insurance
Abstract :
[en] This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risksharing is limited by enforcement constraints of cross border assistance. It is shown that, when one takes into account risk-sharing and limited commitment, fixed exchange rate regimes associated with a currency area can dominate flexible exchange rate regimes, which reverses the standard result.
Disciplines :
International economics
Author, co-author :
Picard, Pierre M. ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Worrall, Tim
Language :
Title :
Currency Unions and International Assistance
Publication date :


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