Reference : Currency Areas and Voluntary Transfers
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Business & economic sciences : Economic systems & public economics
Currency Areas and Voluntary Transfers
Picard, Pierre M mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) >]
Worrall, Tim [University of Edinburgh]
[en] Monetary Union ; Currency Areas ; Fiscal Federalism ; Limited Commitment ; Mutual Insurance
[en] This paper discusses the relationship between the formation of a currency area and the use of voluntary fiscal transfers between countries. We show that there is a trade off between the benefits of flexible exchange rates and the additional risk sharing benefits of voluntary transfers that can be sustained in a currency area. We show that whether a currency area is beneficial or not will depend on the magnitude of economic parameter values. In particular, we show that in a simple two country model and for a plausible set of economic parameter values, a currency area is optimal.

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