Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United
States was an optimum currency area, although moderating this concern was the finding that
it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen,
1993). Revisiting these issues, we find that the United States is remains closer to an optimum
currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes
in correlations and responses which we interpret as reflecting hysteresis with a financial
twist, in which the financial system causes aggregate supply and demand shocks to reinforce
each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its
banking and financial systems by a single supervisor—that monetary union without banking
union will not work.
Mr. Paulo Drummond, Mr. Ari Aisen, Mr. Emre Alper, Ms. Ejona Fuli, and Mr. Sébastien Walker
This paper examines how susceptible East African Community (EAC) economies are to asymmetric shocks, assesses the value of the exchange rate as a shock absorber for these countries, and reviews adjustment mechanisms that would help ensure a successful experience under a common currency. The report draws on analysis of recent experiences and examines likely future changes in the EAC economies.
The likely enlargement of euro-area membership will radically change the environment under which monetary policy will be made in the euro area. Within less than a decade, the number of member countries in the euro area could more than double, with the vast majority of accession countries being relatively small in economic terms, compared with current members. Absent reforms, such a significant but asymmetric expansion could impede the effectiveness of the institutional policymaking process of the European Central Bank (ECB) and be seen by some as resulting in the overrepresentation of small member countries in the ECB Council. The paper illustrates these issues, describes the principles on which reforms of the ECB statute could build, and discusses four specific institutional reform scenarios. The analysis coincides with the ECB Council being scheduled to present suggestions for reform by late 2002.
This paper considers the extent to which the North American Free Trade Area (NAFTA) meets the criteria for a common currency area. NAFTA is compared with the EC, a regional grouping for which initial plans for a monetary union are already in place. Most of the anticipated benefits from a monetary union in the EC apply with equal force to NAFTA. However, because the underlying disturbances are more diverse across members of NAFTA, the costs of abandoning the exchange rate instrument are likely to be higher. This is particularly true when NAFTA is compared to the EC’s continental core.