Costs and benefits of a monetary union

8 Mar

This paper surveys the literature on the costs and benefits of entering a monetary union.

The main costs are the impossibility of output stabilization through revaluating currency and altering relative wages and prices, the moral hazard in insuring against asymmetric shocks, the impossibility of business cycle smoothing, the trade balance problems related to differences in GDP growth rates of countries in a monetary union, the costs of a necessary structural reform, the constraints on methods of fiscal financing, the decrease of firm profits and consumer surpluses due to the elimination of real exchange rate uncertainty, the reduction of the number of financial instruments for hedging, and finally the inability to independently choose the inflation rate.

On the other hand, the main benefits are the reduction of transaction costs related to a lower number of foreign exchange transactions, the reduction of price uncertainty and increased price transparency, the elimination of speculative attacks, the costs savings on exchange rate stabilization, the elimination of shocks caused by separate currencies, the elimination of competitive devaluations, the transfer of resources between regions experiencing dissimilar economic disturbances, the reduction of investment failures due to the elimination of exchange rate uncertainty, and the network effects.

Costs and benefits of a monetary union
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