Thus, a region or nation experiencing economic depression will be unable to use the interest rate lever to boost the economy. Similarly a country with high inflation will be unable to independently raise interest rates to contain inflation. Moreover, Islamic countries, which form a large part of the geography, do not believe in interest rates. In other words, a country's decision to join a monetary union creates the following trade-off: microeconomic gains resulting from co-ordination policy vis-avis macroeconomic loss as a consequence of not operating independent monetary and fiscal policies.
Political barriers -- Political differences between nations make it extremely difficult for them to adopt a common currency. It can lead to a loss in political sovereignty as monetary interests would need to surpass political interests. This is unlikely to be acceptable to most of the nations and the idea of a single currency may be difficult to implement (Gimp, 2008).
Will Pros and Cons change Over Time? Depending On the Country?
The economic conditions to determine a monetary union depend on: the openness and size of the economy involved to trade; the free movements of capital and labor factors; the high level of intra-regional trade and the diversity of production; and the susceptibility of the economy to asymmetric shocks and the flexibility of the economy to adjust itself to such shocks. In other words, the introduction of a single currency in a specific region depends on what kind of integrated regional market it is (Filho, 2003).
In general, the analysis of OCA shows that fixed exchange rates are more appropriate for countries which are completely integrated. In this context, a country's decision to join a currency area is determined by the weight of the advantages and disadvantages of having (or
not) fiscal and monetary policies centralized to promote economic integration and co-operation policy.
Under these circumstances, what are the advantages and disadvantages to a specific country when it decides to join a monetary union, according to the theory of OCA? The
economic benefits from monetary union are related to the microeconomic efficiency, such as:
the inflation rate in the monetary union would be significantly lowest; the transaction costs
BBC. (1997, November 21). European monetary union - pros and cons. Retrieved May 11, 2009, from BBC News: http://news.bbc.co.uk/1/hi/special_report/single_currency/25081.stm
Filho, F.F. (2003). Is it possible to achieve a monetary union in MERCOSUR? (South America). Retrieved May 11, 2009, from Vanderbilt University: http://sitemason.vanderbilt.edu/files/egnZLy/Ferrari%20Filho%202.pdf
Frankel, J. (1999, August). No single currency regime is right for all countries or at all times. Retrieved May 11, 2009, from Princeton University: http://www.princeton.edu/~ies/IES_Essays/E215.pdf
Gimp, F. (2008, June 27). A world currency - pros and cons and can it become a reality. Retrieved May 11, 2009, from Piponomics: http://www.babypips.com/blogs/piponomics/a_world_currency_pros_and_cons.html
Goldberg, L. (1999). Is optimum currency area theory irrelevant for economies in transition? Retrieved May 11, 2009, from Federal Reserve Bank of New York: http://www.ny.frb.org/research/economists/goldberg/irrelevantoptcurrtheory.pdf
Gulf ministers agree on monetary union in 2009. (2008, December 30). Retrieved May 11, 2009, from Middle East Online: http://www.middle-east-online.com/english/?id=29453
Laufer, N. (1998). European monetary union - pros and cons. Retrieved May 11, 2009, from University of Konstanz: http://www.uni-konstanz.de/FuF/wiwi/laufer/lecture/lecture-english.html
Lavrac, V., & Zumer, T. (2003). Nominal convergence, real convergence, and optimum currency area criteria. Retrieved May 11, 2009, from Bank of Valetta: http://www.bov.com/filebank/documents/BR27%2013_34_Lavrac.pdf
Poon, W.-C. (n.d.). Economic integration and the optimum currency area (oca). Accountants Today, 16-18.
Ricci, L. (1997, June). A model of an optimum currency area. Retrieved May 11, 2009, from International monetary fund - (A working paper): http://www.imf.org/external/pubs/ft/wp/wp9776.pdf
In other words, a country's decision to join a monetary union creates the following trade-off: microeconomic gains resulting from co-ordination policy vis-avis macroeconomic loss as a consequence of not operating independent monetary and fiscal policies.
The documents we provide are to be used as a sample, template, outline, guideline in helping you write your own paper, not to be used for academic credit. All users must abide by our "Student Honor Code" or you will be restricted access to our website.
Disrupting America's economic system is a fundamental objective of terrorists Even as the world continues to struggle with the terrible shock from the September 11 attacks in New York and Washington, one principle lesson has already become clear: disrupting our economic system is a fundamental objective of terrorists. Prior to September 11, our economic environment was certainly not immune to terror, in comparison to many other nations; we lived relatively terror-free. Now,
Unfortunately most growth oriented economic policies such as "supply-side" economic policies tend to exacerbate inequality. A greater role of the government in the economy such as increased taxation on the rich can reduce inequality. Inflation and unemployment are usually inversely proportional in most economies, i.e., increase of money supply through deficit financing reduces unemployment but increases inflation while tight monetary policies reduce inflation but increase unemployment. According to a
Rules and Institutions of the Bretton Woods System The increasing popularity of the importance of monetary unions has gained much focus in the recent past. Most states consider forming monetary unions a solution to most of their financial problems. However, they fail to realize the challenges associated with its establishment and sustainability. Therefore, this research paper analyzes two different monetary unions, their policies, failures and successes and lessons learnt from their
" (Risse, 1998) First, the "Euro is about European union rather than just lowering transaction costs" and secondly "intuitionalists arguments about path dependent processes offer significant insights if they are linked to the more constructivist reasoning" which Risse develops in his work. (1998) Third stated is the primary argument is that "the visions about European order which give political meaning to EMU, need to be understood in the framework of
The Euro vs. Dollarization Dollarization takes place when one country decides to use a foreign currency in parallel to, or instead, of the domestic currency. Dollarization can occur unofficially, without formal legal approval, or semiofficially, where foreign currency is legal tender, but plays a secondary role to domestic currency, or officially, when a country no longer issues a domestic currency and uses only foreign currency. Estimates of the extent to which
Finance The Effect of the Eurozone Today on Global Financial Markets Global markets are so intertwined today that what affects one is definitely going to have an impact on another. Case in point, the recent issues in Greece and other European Union (EU) countries have had a global effect and have wrought havoc on the Eurozone. Because if this global connectedness, large banks and organizations like the International Monetary Fund (IMF) are