The Evidence and Impact of Financial Globalization

Chapter 31

Currency Unions

J.M.C. Santos Silva*,^† and S. Tenreyro^‡

^*University of Essex, Essex, UK

^†CEMAPRE, Lisbon, Portugal

^‡London School of Economics and Political Science, London, UK

Outline

Introduction

The Benefits

Increased Trade

Increased Capital Integration

Commitment Gains

The Costs

Similarity of Shocks and Inflation

Factor Mobility

Openness

Economic Diversification

Price and Wage Flexibility

Fiscal Transfers

Concluding Remarks

Acknowledgment

Glossary

References

Introduction

What is the appropriate domain of a currency area? The current debate about the advisability (and sustainability) of the eurozone shows that Mundell’s (1961) seminal question is today as pertinent as ever.

The case for joining a currency union rests on two main ...