The Minimum Economic Dividend for Joining a Currency Union
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Michele Ca’Zorzi
Abstract
A two-country model is developed to show how the optimality of a currency union depends on whether it brings an economic dividend in terms of potential growth and the Balassa-Samuelson (BS) effect (the steady appreciation of the real exchange rate due to cross-country differences in intersectoral productivity gaps). The model shows that such dividend needs to be larger, the higher the BS effect, the smaller the size of the economy, the larger the cross-country difference in the standard deviation of the supply shocks, the smaller their correlation and the larger the standard deviation of real exchange rate shocks. We calibrate the model to quantify such dividend as a function of plausible ranges of the parameter values. The results suggest that both the BS effect and the size of real exchange rate shocks play a key role in evaluating the optimality of accessing the currency union.
© 2019 by Walter de Gruyter Berlin/Boston
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Articles in the same Issue
- Efficient Specialization in Ricardian Production
- The Minimum Economic Dividend for Joining a Currency Union
- The Monetary Analysis of Hyperinflation and the Appropriate Specification of the Demand for Money
- Testing for Utility Maximization with Error and the Loss of Power
- Does Firm Size make a Difference? Analysing the Effectiveness of R&D Subsidies in East Germany
- The Importance of Time-Series Extrapolation for Macroeconomic Expectations
- A Game-Theoretic Foundation for Competitive Equilibria in the Stiglitz–Weiss Model
- Growth Optimal Investment Strategy: The Impact of Reallocation Frequency and Heavy Tails
- Call for Papers: Special Issue of the German Economic Review on the Economic Effects of Minimum Wages in Germany
