Ec4333 Lecture 4 2007 Final

483 views

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
483
On SlideShare
0
From Embeds
0
Number of Embeds
36
Actions
Shares
0
Downloads
31
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Ec4333 Lecture 4 2007 Final

  1. 1. Lecture 6 Economic Monetary Union Optimal Currency Area Theory Costs & Benefits of EMU Ancient Rome Stephen Kinsella www.stephen kinsella.net
  2. 2. Background
  3. 3. 1990––1999 1. Free Movement of Capital Coordination of Ec. Policy 2. Independent Central Banks The Euro 3. Common Monetary Policy The ECB
  4. 4. Benefits of a Single Currency
  5. 5. Inflation Convergence Within Six Original EMS Members, 1978-2000
  6. 6. So .... Less transactions costs More price transparency Less uncertainty More economic growth
  7. 7. Less transactions costs 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
  8. 8. Price transparency One common unit of account facilitates price comparisons Consumers “shop around” more Competition increases Prices decline and consumers gain
  9. 9. Will euro increase price transparency in a significant way? Large price differentials continue to exist These have to do with transactions costs at the retail level and product differentiation
  10. 10. Handout
  11. 11. Less Uncertainty
  12. 12. Does the decline in exchange risk increase welfare?
  13. 13. Price Certainty Price Uncertainty P P MC MC X P3 P1 P1 A P2 A Y Q Q Profit = A-(Area of ) Profit = A-(Area of )+X+Y
  14. 14. 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
  15. 15. More economic growth
  16. 16. Empirical evidence about monetary union and growth
  17. 17. Next Week Benefits & 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.

×