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When did the Euro develop?
1999
What is An optimal currency area?
an area where the gains from having a common currency for fixed exchange rates are greater than the losses from having it.
What decides if it is an optimal currency area?
It depends on how well integrated countries/regions in the area are with eachother.
Where does Economic integration happens?
- Product markets, trade of goods and services.
- Factor markets, how mobile is capital and labour.
What does A common currency give?
monetary efficiency gains but a loss of economic stability.
What are the Monetary efficiency gains of a common currency?
- Lower transaction costs
- avoids the uncertainty of future income and expenditure that comes with a floating exchange rate.
- More efficient allocation of resources and more efficient markets where capital and labour are allocated when they do the most good.
When is The benefits higher from a common currency and why?
For more integrated countries/regions. Because with more economic integration comes:
- extensive trade
- Free flow of financial assets
- People move freely
What does the GG curve show?
The monetary efficiency gain.
What are the Economic stability loss of a common currency?
- The individual countries loses the ability to absorb shocks in economic crises.
- They cannot conduct its own monetary policy as it has a Common central bank.
- The exchange rate against the other with the same currency cannot be changed.
- Changing the real exchange rate requires changing Price levels, which takes time and is painful.
- A Shock could mean a longer Period rot high unemployment and low returns on capital.
When is The losses smaller from a common currency and why?
For more integrated countries because With more economic integration comes:
- Fall in relative prices has greater effect on demand
- Capital and labour moves easily.
What does the LL curve show?
The economic stability loss.
Where do you find the Critical level of economic integration?
Where LL and GG curve intersect
What does θ it show?
How integrated is country i at time t.
What does θ1 show?
The Critical level of economic integration.
When does a country gain and lose from joining a common currency?
If θit > θ1: gains from joining.
If θit < θ1: Loses out on joining.
