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Abstract
This paper discusses the macroeconomic policy implications of currency zones. It first reviews a set of long-term developments in the world economy that can place the emergence of currency zones in broader perspective. Here it focuses on trends in relative economic size and in the international use of currencies, in relative inflation performance, in the behavior of key-currency exchange rates, in the geographical pattern of international trade, and in the integration of capital markets. Next, the paper addresses the conduct of monetary and exchange rate policy in a currency union—concentrating on the goals of monetary policy, on the consequences of giving up use of the nominal exchange rate, and on the choice between gradual and rapid transition to a currency zone. Finally, it investigates the implications of a currency zone for the conduct of fiscal policy. After discussing the incentives for fiscal adventurism in a currency union, the paper examines market discipline, fiscal rules, and peer-group surveillance as policy mechanisms for achieving greater fiscal policy discipline.
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