â â â â â  abstract: â  as the number of independent countries increases and their economies become more integrated, we would expect to observe more multi-country currency ::::union::::s. this paper explores the pros and cons for different countries to adopt as an anchor the us dollar, the euro or the yen. in addition, it addresses the question of how co-movement of outputs and prices would res...

Previous attempts to analyze the effect of liability dollarization on “fear of floating” have focused exclusively on the role played by foreign liabilities. Liability dollarization of the domestic banking system, however, poses a similar risk as dollar-denominated deposits and credit impose a source of currency risk on domestic banks and firms respectively. Findings from a large cross-country s...

This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in n...

Exchange rates differ considerably with respect to exchange rate volatility, while they are very similar with respect to the macroeconomic fundamentals — the well known exchange rate disconnect puzzle. The microeconomic structure of foreign exchange markets, especially the existence of noise traders, may be responsible for the excessive volatility in flexible exchange rate regimes. The entry of...

The IMF potentially creates moral hazard when it provides bailouts to countries in a financial crisis. We ask whether a creditor moral hazard is observable in the data. We test the hypothesis that recent unprecedented bailouts – starting with the 1994 Mexican crisis – changed international investors’ perception of default risk on international borrowing. Our events-study approach identifies imp...

The accession of several Central and Eastern European Countries to Euroland is likely to be realised within the next years. Some studies aim at analysing the suitability of these Euro aspirants for currency union with EMU by evaluating the related macroeconomic costs. Still, they are prone to the Lucas critique since they do not consider endogeneity of the relevant criteria. We build on methodo...

This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogeno...

This paper analyses the distribution of seigniorage in an enlarged European Monetary Union (EMU) when the new EU member countries from Central and Eastern Europe adopt the euro. In principle each country of a monetary union contributes to seigniorage in proportion to the country’s demand for base money. However, the actual distribution of seigniorage by the European Central Bank is made in acco...

To quantify the implications of common currencies for trade and income, we use data for over 200 countries and dependencies. In our two-stage approach, estimates at the first stage suggest that belonging to a currency union/board triples trade with other currency union members. Moreover, there is no evidence of trade-diversion. Our estimates at the second stage suggest that every one percent in...

In Kohler (2002) we analyse coalition formation in monetary policy coordination games between n countries. We find that positive spillovers of the coalition formation process and the resulting free-rider problem limit the stable coalition size: since the coalition members are bound by the union’s discipline, an outsider can successfully export inflation without fearing that the insiders will tr...