common currency

The results of the paper continue the debate for policy analysis on the benefits of a fixed or a floating exchange rate regime to correct external imbalances. I document adverse valuation effects that difficult the correction of external imbalances for the case of Germany. Even though this should not be a matter of concern as Germany enjoys a creditor position and reaching the external balance should not be crucial, adverse valuation affects could be dan- gerous in other situations. For example, emerging countries with a relevant share of foreign currency liabilities and large debtor positions, could be affected by a local currency depre- ciation as it may trigger large valuation effects that further increase their debtor positions. The findings in this paper do also reveal the need to change the mechanisms of external adjustment once a common currency is in place. Being the nominal exchange rate fixed among the countries of the currency union, other adjustment mechanisms such as internal devaluation and the change in the relative price levels. may operate. It is also important to notice that being part of a currency union may hinder the external adjustment process of a country as the adjustment needs are different for debtor and creditor countries. For instance, as it is documented in this paper, the real exchange rate have evolved according to the adjusting needs of debtor countries such as Italy and Spain, pushing towards larger external positions of creditor countries such as Germany.

Table 5 contains the correlations of external shocks to ECOWAS economies. The positive and statistically significant results are underlined. From the results, it is obvious that the correlations of external shocks are highly significant for most of the ECOWAS economies except for Burkina Faso, Gambia and Guinea-Bissau. The likely reason why external shocks to most of the countries are highly correlated could be as a result of the similar primary product oriented export base of most of the countries. Ceteris paribus, the higher the correlation of shocks from an external source, the greater will be the benefits for countries in the region to form a currency union. This is because under a single currency, the potential bilateral exchange rate distortions brought about by external disturbances are greatly reduced, if not totally eliminated. Following this criterion all the other economies but Burkina Faso, Gambia and Guinea-Bissau will be better-off adopting a common currency.

sample, while in columns three and four we report the correlation coefficients for the two sub- samples before and after the introduction of the euro. In general, the correlation coefficients provide strong evidence that the business cycles of the studied countries and groups of countries became less synchronized with the cycle of the EU15 and the G3 group after the introduction of the euro in 2002. More specifically, in Table 3, where EU15 is the base for the calculation, only the cycles of Luxemburg and Portugal appear more synchronized with the cycle of EU15 after the introduction of the common currency. All other countries’ and groups of countries’ cycles became less synchronized with EU15 in the euro era. The results are almost identical when the base group for comparison of the individual countries’ and groups of countries’ cycles is G3, the group of the three largest economies in the EU. Now the only country that appears to have a higher correlation coefficient in the second sub-sample, after the introduction of the euro, is Portugal. All other cycles are less synchronized in the common currency era.

Each cycle represents the foreign exposure of a given Eurozone country to other member countries as well as its exposure to major economies. The figure shows how a country would influence the rest in the event of a default. The countries of interest are: Greece, Spain, Portugal, Italy and Ireland. With 2tn euro of gross foreign debt, Italy has the highest exposure towards national banks of the Eurozone countries, and those of the U.S, Japan, and the UK. Spain comes second with 1.9tn, followed by Ireland 1.7tn and finally Portugal and Greece at the same indebtedness level of 0.4 tn. Given these amounts and the interlinkages of each country with national banks of the other countries, the creditworthiness of Italy, Ireland and Spain seem to be the main sources of worry regarding the common currency, which is in line with our empirical results. French and German banks together hold 429bn, 243.7bn, 105,8 bn of Italian, of Spanish and Irish debt respectively, whereas they only hold 57.3 of Greek claims. This lends further credence to our results which do not display significance for Greece. In the case of default, France and Germany would be in position to absorb the shock more easily than if Italy, Spain or Ireland were to default. Furthermore, while Portugal and Greece have similar levels of debt,

These countries are very interested in a policy that could offer them a way of achieving a truly fixed exchange rate that might contribute to prevent future currency crises as well as sustained economic stabilization, lower inflation, and greater long-term economic growth. Dollarization has emerged as an option, in particular in Latin America; the issue has been raised recently in a number countries within the hemisphere, causing significant debate. The outgoing president of Argentina and the just-departed president of El Salvador, have called for official dollarization. Actually, Argentina’s President Menem has already taken one step further proposing a dollarization plan that includes setting up an agreement with the United States 1 . Advocates of dollarization are also making some inroads in Mexico. Mexico’s business executives as well as a number of well-known economists speak for Mexico’s emulation of Argentina's monetary reforms, suggesting that the country should abandon the peso and go on a dollar-based system. Mexican officials began exploring the idea of taking steps toward some sort of eventual monetary union with the United States. The dollarization option has also been discussed in Canada, where the idea of the U.S. dollar as a common currency for the signatory nations to NAFTA is being seriously considered. Additionally, the influential Inter-American Development Bank has also triggered Latin American developing countries to dollarize, or even create a new regional dollar- linked currency.

In 2002, McKinnon exposed what he believed were contradictory arguments inherent in the Optimum Currency Area Theory as first defined by Mundell, compared to his position and support for the creation of the euro. While Mundell clearly did not support the “balkanization” of the world’s currency areas, his arguments, according to McKinnon, do suggest a movement towards smaller, more clearly defined currency areas derived from similar underlying economic factors. Yet, this would be inconsistent with Mundell’s enthusiasm for the euro. In addition, concerning asymmetric shocks, it appears Mundell’s view had shifted. One of his original criteria for optimality was the incidence of asymmetric shocks, and how they affected countries differently within the same bloc. If economic regions reacted severely differently to a shock, they did not meet the requirements for optimality and so, should not form a currency area. Later, however, Mundell argued that a common currency could help nations recover from asymmetric shocks by better reserve pooling and portfolio diversification. In that case, the currency area has already been formed under sub-optimal conditions, yet has the potential to, or effect of, making itself more optimal by smoothing out differences between members. The two cases, however, may not be so contradictory. Mundell believes a currency area can induce its own optimality endogenously, even if it may not have been optimal at the outset. McKinnon remained skeptical.

financial crisis and that there is a greater degree of interdependency among the countries in the region. In the context of East Asian production networks, it is rational to argue that the condition of greater labor mobility is largely attained by vertical fragmentation of production processes across borders in East Asia 2 . Note that the notion of labor mobility is meant not to be in terms of geographical and/or inter-industry dimensions as indicated in the OCA literature, but by the way of intra-industry fragmentation of product value chain across national borders. The present study therefore conjectures that East Asia is an optimum currency area. However, East Asian countries have their independent national currencies and pursue heterogeneous exchange rate policies. This leads to the research question: what would happen to East Asian production networks and regional trade integration, had there been a common currency? To put it differently, what is the

area which sees that all kind of trade impediments, such as import duties and quota restrictions, are not applicable among partner members. One notable example was the European Free Trade Area Association 10 (EFTA) established by the EFTA Convention in 1960 which included Iceland, Liechtenstein, Norway and Switzerland. More recently, in the Barcelona Declaration (1995), the Euro-Mediterranean Partners 11 agreed on the establishment of a Euro-Mediterranean Free Trade Area (EMFTA) by the target date of 2010. Further, the custom union follows the free trade area. The custom union is then characterized by a free trade area among member states and a common external tariff towards third countries. The most relevant example is the custom union between the EU and Turkey signed in 1995, which allows goods to travel between both the EU and Turkey without customs restrictions. When custom unions lead to a common external regulation and a fully free internal market of goods, services, labor and capital, member states are enjoying what is called a common market. When a group of countries with a common market achieve a high degree of coordination of sound economic policy, those countries form an economic union. This is transformed into a monetary union when the currencies of the member states are linked by a fixed exchange rate to a common currency. In this case, we should talk about an economic and monetary union (EMU).

In this study, we have committed ourselves to an evaluation of the feasibility of the proposed common currency in West Africa as the region is moving inexorably towards closer monetary cooperation. A multivariate structural VAR model was used to examine the symmetry of four kinds of disturbances affecting the region. They include external shocks, supply shocks, demand shocks and monetary shocks. Countries having positive and significantly correlated shocks are categorized as potential candidate for the proposed currency union. This is because synchronicity of national business cycles across the region implies that the economies are amendable to similar region- wide policy measures. The study also emphasized the responses of the economy to the disturbances (impulse responses) and the decomposition of the disturbances into the component sources. The decomposition/ disaggregation of the shocks is important because differences in the cause of the variability in the countries could be indicative of underlying differences in policy strategies and transmission mechanisms which may be potential obstacles to regional monetary unification.

As early as 1945, twenty two Arab nations had planned a common currency to be called the ‘Arab Dinar’. 1 That idea however, did not take root. For several countries within MENA, exchange rate management has largely been a difficult experience. Their experience has generally been one of a fixed peg but incompatible macroeconomic policies causing exchange rate misalignment, serious overvaluation, capital flight, balance of payments problems and currency crises. More recently, most MENA countries have made considerable progress in liberalization of trade/financial systems and the adoption of pro market monetary policies. These have ameliorated to some extent their perennial problems with exchange rates. Since the introduction of a single European currency, the Euro, in January 1999, there has been much interest in the area of Optimal and Common Currency areas. That it has worked relatively well over its first five years and is being well accepted has served to further this interest. The Euro’s success aside, a number of external factors have led to renewed interest in Common Currency Areas (CCA). Globalization is one. As countries and governments grapple with the challenges of globalization, the idea of a common currency becomes more palatable. Additionally, the frequency and the depth of recent currency crises have raised the question of whether maintaining individual national currencies and the attendant independent policies are worth the cost.

On July 21, 2005, the Chinese government announced that the monetary authority would adopt a managed floating exchange rate system with reference to a currency basket. In recent years, so too have the monetary authorities of some East Asian countries been found to be adopting currency basket systems. Ogawa and Ito (2002) also discussed East Asian countries adopting a common currency basket regime in order to stabilize intra-regional exchange rates in a situation where these countries have increasingly close trade and economic relationships with each other. A common currency basket peg would allow both misalignment among intra-regional currencies and volatility vis-à-vis the outside currencies, including the US dollar and the euro, to be restrained.

In this paper, we investigate possibilities of adopting a common currency basket peg arrangement into the ASEAN plus three. We used the DOLS to estimate the cointegrating vector for ASEAN plus three currencies with the currency basket of the US dollar and the Euro as the anchor currency according to the modified G-PPP model. We obtained the analytical results that the Japanese yen should be included as an endogenous variable in the long-term relationship as well as other East Asian currencies while the Japanese yen worked exogenously as well as the Euro and the US dollar in the system composed of the East Asian currencies. It implies that it is increasing the possibilities of success in adopting the common currency basket arrangement into the ASEAN plus three countries that include Japan.

Since Robert Schuman, French Minister of Foreign Affairs, issued his famous “Declaration of Inter-Dependency” (as scholars like to call it) on May 9, 1950, announcing the establishment of the European Community of Coal and Steel (an original idea of his adviser Jean Monnet), no other European Union (EU) move has been as important as the adoption of the euro. On January 1, 2002, twelve European countries began to use a common currency. The culmination of a long series of efforts to respond to the formidable challenges in this new and crucial stage in the history of the European Union is more of a political than a financial operation. It marks the end of a cycle that began in the mid 1980s (during the uncertainty of the political changes to come) when what was then still the European Community (EC) decided to take the road that led to the Single European Act of 1986 and the Maastricht Treaty of 1992. The euro is a new “bold act,” as was Schuman’s declaration.

The traditional view, inspired by the early optimal currency area lit- erature (see Mundell, 1961; McKinnon, 1963; Kenen 1969), stresses the importance that countries belonging to a common currency area are highly integrated among each other. The motivation for this is that a high degree of integration, for example in terms of trade, might help reduce the likeli- hood of asymmetric shocks and unsyncronised business cycles. While this line of reasoning has been re…ned and critically discussed over the years (e.g. Corden, 1972; Mundell 1973), it has remained, until recently at least, the mainstream view. 1

An introduction of the common currency in the European region imposes the question of its contributions to stabilize exchange rates and their impacts on real economy. The argument that the elimination of the exchange risk will lead to an increase in economic growth can be made using the neoclassical growth model, and its extension to situations of dynamic economies of scale. This analysis featured prominently in the European Commission report ‘One Market, One Money’ (1990). According to this model, elimination of exchange risk reduces the systemic risk. This would have the effect of lowering the real interest rate. The reason is that in a less risky environment, investors would require a lower risk premium to make the same investment. In addition, when agents discount the future they are willing to use a lower discount rate. Due to this, there will be an accumulation of capital and an increase in the growth rate of GDP. Some of the various channels through which exchange rate volatility transmit to more economic growth are described below.

Abstract. Latin America has a long history of attempts to achieve regional integration, yet success has been modest. This paper contends that this is essentially due not so much to protectionist practices in the various countries, but to the lack of a common currency, or, at least, of a tightly managed exchange rate band. We reviewed the optimum currency area criteria that indicate it is prudent to increase economic integration before attempting to establish exchange rates coordination. Yet, we show that in the Mercosul there are already the minimal requirements to work on this direction. Diminishing exchange rate instability could encourage trade and investment flows across Latin American economies. We also performed a simplified exercise to understand how feasible would be the efforts to achieve exchange rate parity stability in the two larger economies in the region (Brazil and Argentina) and step forward toward adopting a common currency.

Confronted with economic meltdown owing to severely invested hyperinflation, the country abandoned its local currency for the multicurrency regime. Because a dollarized country cannot create US dollars, money supply in Zimbabwe may be increased through trade surpluses and capital inflows. In the same vein, international competitiveness and attracting foreign capital become key because declining money supply may stimulate unemployment and deflation. This heightens the need for more export trade. Underlying theory on dollarization hypothesizes that improved trade emerges between small open economies and an anchor country issuing the adopted foreign currency. Against this background, the study was motivated by the need to test whether theory prediction apply to Zimbabwe by examining the effects of common currency on bilateral trade between Zimbabwe and its anchor countries. The methodology utilizes a gravity model with panel data for the period 2009 to 2013 from a sample of 12 countries. The results indicate that common currency is statistically significant in explaining bilateral trade flows between Zimbabwe and its anchor countries. It is recommended that focus should be centered on production of commodities which are highly required by anchor countries with due diligence being applied to composition and value of exports.

This Note critically examines three relief mechanisms created by euro members and EU institutions to combat the debt crisis and save the com- mon currency: the Europe[r]

For the trading nations of East Asia, the volatility of cur- rency exchange rates is disruptive and costly. For several years, economists have given careful consideration to methods for stabilising intraregional exchange rates. Ka- wai [1] noted the emergence in East Asia of macroeco- nomic and structural convergence such as preceded the European monetary integration; this convergence has been acknowledged as a necessary condition, first identi- fied by Mundell [2], for the introduction of a common currency. More specifically, Hsu [3] examined the feasi- bility of a common currency for Hong Kong, Korea, Malaysia, Philippines, Singapore and Thailand, and con- cluded that these six economies exhibited features that favoured adoption of region-wide monetary policies. Soo and Chung [4] re-investigated the behaviour of these six economies, concluding that segmentation had declined significantly.

Before contemplation of a common currency, the countries should be evaluated using Mundell’s 'optimal currency area' as outlined in the American Economic Review (Mundell, 1961). The theory of optimum currency area examines the advantages and disadvantages of different regions adopting the same currency. Mundell notes that adopting a uniform currency has both advantages and costs, with the advantages stemming from the lower costs of changing money, and its greater value as a medium of exchange. He essentially simplifies common currency into two qualities, operating internally and externally. Externally, it is a regulator of exchange rates. Internally, it is a regulator of interest rates. Prior to addressing the technical details of issuance, implementation and function, a nation must carefully examine the short - and long-term rewards and benefits for its citizens that could result from a common currency. Most importantly, countries must recognize that a wide range of decisions currently made within one country would now be made by a group of countries. In fact, although each region considering the common currency will do so individually, an aggregate decision must be made to accept or reject.