Ec4333 Lecture 4 2007 Final
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Transcript of Ec4333 Lecture 4 2007 Final
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Economic Monetary UnionOptimal Currency Area Theory
Costs & Benefits of EMUAncient Rome
Lecture 6
Stephen Kinsellawww.stephen kinsella.net
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Background
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Free Movement of Capital
Coordination of Ec. PolicyIndependent Central Banks
The EuroCommon Monetary Policy
The ECB
1.
2.
3.
1990––1999
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Benefits of a Single Currency
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Inflation Convergence Within Six Original EMS Members, 1978-2000
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Less transactions costs
More price transparency
Less uncertainty
More economic growth
So ....
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Elimination of foreign exchange markets within union eliminates cost of exchanging one currency into another
Cost reductions amount to 0.25 to 0.5% of GDP
Less transactions costs
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One common unit of account facilitates price comparisons
Consumers “shop around” more
Competition increases
Prices decline and consumers gain
Price transparency
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Large price differentials continue to exist
These have to do with
transactions costs at the retail level
and product differentiation
Will euro increase price transparency in a significant way?
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Handout
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Less Uncertainty
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Does the decline in exchange risk increase
welfare?
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P P
Q Q
P1 P1P2
P3
MC MC
X
YA
A
Price Certainty Price Uncertainty
Profit = A-(Area of ) Profit = A-(Area of )+X+Y
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Profits are higher on average when there is price certainty
Welfare will then depend on degree of risk aversion
If risk aversion sufficiently high price certainty is preferred by firms
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More economic growth
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Empirical evidence about monetary
union and growth
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Next WeekBenefits & Costs of a Single Currency
We’ll develop Optimal Currency Area Theory
Read
Pelkmans, J. European Integration: Methods and Economic Analysis 1st ed., pgs. 83–104 and 133–155. 337.142 PEL.