Monetary, or exchange rate unions can be defined as areas within which exchange rates bear a permanently fixed relationship to each other. Without capital controls, only one monetary policy can exist in such areas.1 Such areas of exchange stability might also involve the replacement of the currencies of member countries by a common currency, that is, the formation of a common currency area or currency union. But because the implications for monetary policy independence are the same for monetary and currency unions, the two will be treated together in this paper.2

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