Ec4333 Lecture5 2007

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Ec4333 Lecture5 2007

  1. 1. Lecture 5 Costs of Single Currency OCA Theory Cool Example
  2. 2. Last Week Less transactions costs More price transparency Less uncertainty More economic growth
  3. 3. With Neal Costs of EMU Loss of Flexibility Asymmetric Effects
  4. 4. Costs of a Single Currency
  5. 5. Effectiveness of devaluation as a function of openness Very open country Relatively closed country PO PC SO SC DO DC YC YO
  6. 6. Can Ireland reach a more attractive (lower) inflation equilibrium? Germany Ireland E G C F A UG UI Fixing the exchange rate of the Punt with the Dmark is not credible, because Irish authorities have an incentive to create surprise inflation (devaluation)
  7. 7. Optimal Currency Area Theory
  8. 8. “An optimum currency area is a group of countries for whom it is optimal to adopt a common currency and form a currency union.” See http://faculty.haas.berkeley.edu/arose/ABTFinalNBER.pdf
  9. 9. 1. Labour Mobility 2. Production Diversification 3. Openness 4. Fiscal Transfers 5. Homogeneous Preferences 6. Commonality of Destiny
  10. 10. Handout
  11. 11. Cool Example

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