Costs Of Common Currency

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Costs Of Common Currency

  1. 1. By Parul Tongaria Nachiket Karajagi Group 2 Common Currency and its Costs
  2. 2. Introduction <ul><li>What is currency? </li></ul><ul><ul><li>Currency is the means of purchasing through trade </li></ul></ul><ul><ul><li>Today, currency generally refers to printed or minted money </li></ul></ul><ul><ul><li>Types of currency </li></ul></ul><ul><ul><ul><li>Floating currency </li></ul></ul></ul><ul><ul><ul><li>Fixed currency </li></ul></ul></ul>
  3. 3. Timeline of currency/money 1000 BC Metals used as medium of exchange 600 BC First Coins 1000 AD Paper money in China 1500 AD Banking emerges In Europe 1700 AD David Ricardo Invents Gold standard 2000 AD Managed paper currencies
  4. 4. Current Scenario <ul><li>194 current official or de facto currencies </li></ul><ul><li>In terms of trading volume, the currency exchange market is the world’s largest market (1.5 Trillion US dollars) </li></ul><ul><li>Used by consumers, Businessmen, Investors, speculators, Commercial and Government banks. </li></ul>
  5. 5. Optimum Currency Area (OCA) <ul><li>Pioneered by economist Robert Mundell </li></ul><ul><li>Three principal characteristics are: </li></ul><ul><ul><li>Labour mobility across the region </li></ul></ul><ul><ul><li>Openness with capital mobility and price and wage flexibility across the region </li></ul></ul><ul><ul><li>An automatic fiscal transfer mechanism </li></ul></ul>
  6. 6. Costs of Common Currency <ul><li>Close trade ties are a MUST </li></ul><ul><ul><li>If not, advantage is negligible </li></ul></ul><ul><ul><li>Similar level of economic development </li></ul></ul><ul><li>Loss of independent monetary policy </li></ul><ul><ul><li>Moderating demand shocks </li></ul></ul><ul><ul><li>Influence inflation rates </li></ul></ul><ul><li>Monetary union and Asymmetric shocks </li></ul><ul><ul><li>I nsurance from the central monetary governmen t </li></ul></ul>
  7. 7. Costs of Common Currency (contd) <ul><li>Labor markets and labor unions </li></ul><ul><ul><li>C entralized or D ecentralized (Germany and UK) </li></ul></ul><ul><ul><li>D ivergent wage and price developments </li></ul></ul><ul><ul><ul><li>Eg: Reaction to oil price rise </li></ul></ul></ul><ul><li>Costs of institutions and individuals adjustment </li></ul><ul><ul><li>Adjust invoices, payrolls, bank accounts etc </li></ul></ul><ul><li>Inflation and unemployment </li></ul><ul><ul><li>different preferences about inflation and unemployment </li></ul></ul>
  8. 8. Costs of Common Currency (contd) <ul><li>Different Fiscal and legal systems </li></ul><ul><ul><li>Fiscal </li></ul></ul><ul><ul><ul><li>Different combinations of debt and monetary financing </li></ul></ul></ul><ul><ul><li>Legal </li></ul></ul><ul><ul><ul><li>Mortgage and interest rates </li></ul></ul></ul><ul><li>Loss of revenue from seigniorage </li></ul><ul><ul><li>I mportant source of public budget is lost </li></ul></ul><ul><li>Different growth rates </li></ul><ul><ul><li>Some countries grow faster than others </li></ul></ul><ul><ul><li>T rade balance problem </li></ul></ul><ul><li>Loss of cultural identity </li></ul>
  9. 9. Conclusion <ul><li>Difficult for diverse countries </li></ul><ul><li>Political unwillingness </li></ul><ul><li>Except Euro area not many regions </li></ul><ul><li>Costs may be overwhelming. </li></ul>
  10. 10. References <ul><li>Costs and benefits of common currency for ASEAN – Srinivasa Madhur, ADB </li></ul><ul><li>Is Asia an optimum currency area? – Barry Eichgreen, Tamim Bayoumi </li></ul><ul><li>Economic Structure and the Decision to Adopt a Common Currency – Frankel and Rose </li></ul><ul><li>Optimal Currency Area – Alesena, Barro and Tenreyro </li></ul><ul><li>The effects of common currency on Europes economic integration – Ognian hishow </li></ul><ul><li>Progress toward a Common Currency Basket System in East Asia – Ogawa and Shimizu </li></ul><ul><li>Advantages and Disadvantages of introducing the Euro – Pszczolka </li></ul><ul><li>Common SAARC currency: Feasible? </li></ul><ul><li>The Prospects of Monetary Integration in East Asia – Hazel Yuen </li></ul>
  11. 11. Thank you!!

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