Lecture 1 Flashcards
Preferential Trade Agreements
Lower barriers to trade for participating nations
Free Trade Areas
Removes all barriers to trade among participating nations, yet each nation still sets its own barriers to non-participating nations
Customs Union
Removes all barriers to trade among participating nations, and harmonizes foreign policy to non-participating nations.
Common Market
Removes all barriers to trade, harmonizes foreign policies and allows for
Free movement of capital and labour between participants.
Economic Union
Removes barriers to trade, harmonizes foreign policies, allows free movement of capital and labour.
Unifies monetary, fiscal and tax policies of members
Dynamic benefits from a customs union
- Increased competition
- Economies of scale in production
- Stimulus to investment
Maastricht Treaty
- A treaty on the EU
Purposes 2nd increase in economic integration:
- Formation of a monetary union
- new areas of cooperation assigns parliament with new authority
1 July 1990 in EU history
Abolition of all restrictions on the movement of capital
1 January 1994 in EU history
Establishment of the European monetary Institute, predecessor to the European Central Bank.
1 January 1999 in EU history
Fixing of conversion rates
ECB is responsible for monetary policy.
1 January 2002 in EU history
Introduction of the Euro notes and coins.
The impossible trinity
- Full capital mobility
- Fixed exchange rates
- Autonomous monetary policy
7 Exchange Rate Regimes
- Fixed
- Floating
- Managed Floating
- Target Zones
- Crawling Pegs
- Currency board
- Dollarization / Euroization
Target Zones exchange rate regime
Wide range in which currency is allowed to move vis-a-vis anchor
Crawling Pegs exchange rate regime
Sliding central parity and band of fluctuation
Currency board
Fixed exchange rates with monetary policy solely dedicated to an exchange rate target
Benefits of a common currency
- Lower transaction costs
- Greater price transparency
- Reduction in uncertainty leads to higher economic growth (lower interest rates)
Costs of adopting a common currency
- Loss of monetary and exchange instruments
- matters in case of:
- Price and wage stickiness
- Assymetric shocks.
Three classic (economic) optimal currency area criteria:
Labour mobility (Mundell) Production diversification (Kenen) Openness (McKinnon)
Three political optimal currency area criteria:
- Fiscal transfers
- Homogenous preferences
- Solidarity vs Nationalism
Criteria 2: (Kenen) Production diversification:
Countries whose exports and production are widely diversified and of similar structure form an OCA.
In that case, there are few Assymetric shocks and usually of small concern.
Criteria 4: Fiscal transfers
Countries that agree to compensate each other in case of Assymetric shocks form an OCA.
This acts as an insurance that mitigates the costs.
Criteria 5: Homogenous preferences
Countries that share a wide consensus on how to deal with shocks form an OCA.
5 Forms of Economic Integration
- Preferential Trade Agreements
- Free Trade Areas
- Customs Union
- Common Market
- Economic Union
