miércoles, 8 de septiembre de 2010

The Benefits of a Currency Union

What does a country gain from joining a currency union? From an economic theory point of view, the traditional Optimum Currency Area (OCA) theory argues that only countries that form an economic region, i.e. have a high level of labor and capital mobility between them, would be better off by having a common currency. On the one hand, the cost of currency conversion would disappear and this would promote trade. On the other hand, such a region would not be subject to asymmetric shocks. That is economic shocks with different effects on each country, which would require a country’s central bank to use the exchange rate as a policy tool to stabilize the economy. Since in a currency union such a policy tool would not be available, the adjustment process from such shocks would have to be done through fiscal transfers between countries, the emission of public debt or through deflationary pressures on wages.