The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.


The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Paolo Mauro

The IMF’s mandate to conduct surveillance over international exchange rates has led IMF researchers to consider the desirability of and the requisite supporting policies for, many currency unions in past decades. Given its broad country membership, the IMF analyzes all currency unions, including unions that consist of small developing countries, a subject often underexplored by researchers in developed countries. These small-country currency unions are of interest intellectually and in terms of policy; they also provide lessons of broader relevance. This article surveys the work on currency unions done at the IMF.

Work related to exchange rate regimes and currency unions is at the core of the IMF’s mandate. Member countries of the IMF choose their own exchange rate regimes, but the IMF plays an important advisory role on whether a country’s exchange rate regime is consistent with other policies. IMF researchers’ interest in currency unions may also have been spurred by Robert Mundell’s stint in the IMF Research Department in the early 1960s: his first seminal contributions to the theory of optimum currency areas (OCA) were published about the time he joined the department.1

IMF researchers have made significant theoretical contributions in this area of study. Bayoumi (1994) developed possibly the first formal OCA model, obtaining some of the key insights (which had been expressed only discursively in earlier papers) on the role of openness, diversification, labor mobility, and correlation of economic shocks in a general equilibrium context with microeconomic foundations.2 Ricci (1997) not only examined the real aspects of OCA theory, but also its monetary aspects and the interaction with real aspects, and derived the conditions under which openness makes a currency union more attractive.3

Research has also been conducted on fiscal policies within currency unions and on the institutional features of a common central bank. Debrun (2000) argues that fiscal rules are necessary to provide credibility to a monetary union even with an independent central bank.4 Bayoumi and Masson (1998) provide evidence that fiscal stabilization policies conducted by individual countries within a currency union tend to be less effective than supranational stabilization policies that provide insurance across countries.5 Debrun (forthcoming) shows that bargaining among founding member countries of a currency union tends to result in a supranational central bank resembling a national central bank with the strongest inflation-fighting credentials.6

Empirical work has shown that observed exchange rate and monetary policies can be related to variables identifed as important by OCA theory. Bayoumi and Eichengreen (1998) find that pressures on the exchange rate mainly reflect asymmetric shocks, whereas intervention reflects a country’s small size and large trade links—the variables that cause countries to value stable exchange rates according to OCA theory.7 Ricci and Isard (1998) show that the relative variability (against external currencies) of the euro and a basket of predecessor currencies depends on the relative sizes of countries, their sectoral patterns of trade, and the relative importance of different shocks.8

Much of the recent work on currency unions at the IMF has focused on whether particular groups of countries have the requisite economic and institutional characteristics for the successful operation of a currency union. As there is no definitive empirical criterion for determining whether a group of countries constitutes an OCA, most empirical analyses compare key OCA variables between existing and proposed unions. Pioneering work in this vein was done by Bayoumi and Eichengreen (1993), who showed that economic disturbances were more correlated among the states of the United States than among the countries of Europe.9

With a focus on the European Economic and Monetary Union (EMU), Bayoumi and Prasad (1997) examine sectoral data on output and employment for eight U.S. regions and eight European states, and find that labor market adjustment is slower in Europe than in the United States.10 Bayoumi and Eichengreen (1997) estimate an OCA index for the European countries, and find that Europe looked more like an OCA in 1995 than it did in 1987, suggesting that economic integration increased the desirability of monetary integration.11 Kopits (1999) and Masson (1999) argue that participation in the EMU would be desirable for the Central and Eastern European countries that aspire to European Union membership, and outline possible strategies for their exchange rate policies in the interim.12

IMF Occasional Paper No. 207

Malaysia: From Crisis to Recovery, 1997–2001

Kanitta Meesook, Il Houng Lee, Olin Liu, Yougesh Khatri, Natalia Tamirisa, Michael Moore, and Mark H. Krysl

Malaysia’s approach to handling the Asian crisis during 1997–2001 raised much debate about the policy options available to emerging markets for crisis management. This new study reviews Malaysia’s approach—which included a fixed exchange rate regime and the introduction of capital controls—and outlines key policy issues confronting the Malaysian authorities at the time of the crisis. Attention is given to the policy mix that helped the economy to recover and the implications for future crisis prevention and management. The authors estimate Malaysia’s potential output and provide an analysis of the economy’s inflation dynamics. Also included in this study are summaries of analytical work done by IMF staff on a number of related topics including fiscal management, the impact of the capital controls, financial sector restructuring, and corporate sector reforms.

Detailed contents of IMF Occasional Papers are available at the Research at the IMF website at

Bayoumi and Eichengreen (1994) find that the underlying economic disturbances are more diverse across the countries of the North American Free Trade Area (NAFTA) than across the countries of EMU, implying that the costs of abandoning the exchange rate instrument would be higher in the case of NAFTA. Similarly, they find the correlation of disturbances across Mercosur countries to be small and insignificant.13

Bayoumi and Mauro (1999) and Bayoumi, Eichengreen, and Mauro (2000) find that on economic criteria (including direction of trade, correlation of aggregate supply shocks across countries, size of shocks and speed of adjustment to them, and degree of similarity of the monetary transmission mechanism across countries) the Association of South East Asian Nations seems to be less suitable for a regional currency arrangement than the European Union was before the Maastricht treaty, although the difference is not large; political commitment would be a key factor in improving the chances of success of the proposed union.14

Jadresic (forthcoming) argues that, for the countries in the Gulf Cooperation Council, moving from individual currencies currently de facto pegged to the U.S. dollar, to a single common currency, which would also be strongly linked to the dollar, would yield little added benefit or cost. Nevertheless, a properly implemented currency union might enhance economic efficiency, deepen regional integration, and foster development of the non-oil economy.15

Van Beek and others (2000) provide a thorough and comprehensive review of the institutional characteristics of the Eastern Caribbean Union, and of recent economic developments in the area.16 They argue that the common currency arrangement has promoted fiscal discipline, despite the absence of fiscal harmonization targets.

Hoffmaister, Roldós, and Wickham (1998) show that external shocks seem to have a greater impact on CFA franc zone countries than on non-CFA countries in sub-Saharan Africa, and argue that this finding may reflect the absence of the exchange rate as a shock absorber for the CFA countries.17 Masson and Pattillo (2001) argue that a proposed monetary union in West Africa (ECOWAS) could create the temptation for fiscal profligacy through prospects of a bailout, or costs diluted through the membership; such a union could promote fiscal discipline only if the fiscal authorities are also tied by a strong set of fiscal restraints.18

Guillaume and Stasavage (2000) consider several past, present, and potential currency unions in sub-Saharan Africa, including the Rand Common Monetary Area. They argue that currency unions help improve policy credibility, but only under stringent conditions.19 On the basis of trade patterns and correlations of economic disturbances, Bayoumi and Ostry (1997) find little evidence that sub-Saharan countries would benefit in the future from larger currency unions.20

Note: The web version of this article, available at, contains an appendix listing the countries involved in each of the existing and proposed currency unions mentioned above.


Robert Mundell, currently University Professor at Columbia University and the 1999 Nobel Laureate in Economics, was a staff member of the IMF between August 1961 and September 1963. “A Theory of Optimum Currency Areas” was published in the American Economic Review, Vol. 51, No. 4, pp. 657–65 (September 1961).


Tamim Bayoumi, “A Formal Model of Optimum Currency Areas,” IMF Staff Papers, Vol. 41, pp. 537–54, 1994.


Luca A. Ricci, “A Model of an Optimum Currency Area,” IMF Working Paper 97/76, 1997 (also published as “Un modèle simple de zone monétaire optimale,” Economie et Prévision, Vol. 128, 1997).


Xavier Debrun, “Fiscal Rules in a Monetary Union: A Short-Run Analysis,” Open Economies Review, Vol. 11, pp. 323–58, 2000.


Tamim Bayoumi and Paul Masson, “Liability-Creating Versus Non- Liability-Creating Fiscal Stabilisation Policies: Ricardian Equivalence, Fiscal Stabilisation and EMU,” Economic Journal, Vol. 108, 1998.


Xavier Debrun, “Bargaining over EMU vs. EMS: Why Might the ECB be the Twin Sister of the Bundesbank?” Economic Journal, forthcoming.


Tamim Bayoumi and Barry Eichengreen, 1998, “Exchange Rate Volatility and Intervention: Implications of the Theory of Optimum Currency Areas,” Journal of International Economics, 1998, Vol. 45, No. 2, pp. 191–210.


Luca Ricci and Peter Isard, “EMU, Adjustment, and Exchange Rate Variability,” IMF Working Paper 98/50, 1998 (also forthcoming in European Economic Review).


Tamim Bayoumi and Barry Eichengreen, “Shocking Aspects of European Monetary Integration,” in Adjustment and Growth in the European Monetary Union, ed. by Francisco Torres and Francesco Giavazzi (Cambridge: Cambridge University Press, 1993).


Tamim Bayoumi and Eswar Prasad, “Currency Unions, Economic Fluctuations, and Adjustment: Some New Empirical Evidence,” IMF Staff Papers, Vol. 44, pp. 36–57 (March 1997).


Tamim Bayoumi and Barry Eichengreen, “Ever Closer to Heaven? An Optimum-Currency-Area Index for European Countries,” European Economic Review Papers and Proceedings, 1997, Vol. 41, pp. 761–70.


George Kopits, “Implications of EMU for Exchange Rate Policy in Central and Eastern Europe,” IMF Working Paper 99/9, 1999; and Paul Masson, “Monetary and Exchange Rate Policy of Transition Economies of Central and Eastern Europe After the Launch of EMU,” IMF Policy Discussion Paper 99/5, 1999.


Tamim Bayoumi and Barry Eichengreen, “One Money or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World,” Princeton Studies in International Finance, No. 76, 1994; and Tamim Bayoumi and Barry Eichengreen, “Monetary and Exchange Rate Arrangements for NAFTA,” Journal of Development Economics, 1994. On Mercosur, see also Michael Mussa, Paul Masson, Alexander Swoboda, Esteban Jadresic, Paolo Mauro, and Andrew Berg, Exchange Rate Regimes in an Increasingly Integrated World Economy, IMF Occasional Paper No. 193,2000.


Tamim Bayoumi, Barry Eichengreen, and Paolo Mauro, “On Regional Monetary Arrangements for ASEAN,” Journal of the Japanese and International Economies, Vol. 14, No. 2, pp. 121–48, 2000; and Tamim Bayoumi and Paolo Mauro, “The Suitability of ASEAN for a Regional Currency Arrangement,” IMF Working Paper 99/162, 1999 (also published in The World Economy, Vol. 24, No. 7, pp. 933-54, 2001).


Esteban Jadresic, “On a Common Currency for the GCC Countries,” IMF Policy Discussion Paper, forthcoming.


Frits van Beek, Jose Roberto Rosales, Mayra Zermeno, Ruby Randall, and Jorge Shepherd, The Eastern Caribbean Currency Union: Institutions, Performance, and Policy Issues, IMF Occasional Paper No. 195, 2000.


Alexander W. Hoffmaister, Jorge E. Roldos, and Peter Wickham, “Macroeconomic Fluctuations in Sub-Saharan Africa,” IMF Staff Papers, Vol. 45, No. 1, 1998. For a review of institutional features, recent developments, and policy issues in the CFA zone, see also Michael T. Hadjimichael and Michel Galy, “The CFA Franc Zone and the EMU,” IMF Working Paper 97/156, 1997; and Ernesto Hernandez-Cata and others, The West African Economic and Monetary Union: Recent Developments and Policy Issues, IMF Occasional Paper No. 170, 1998.


Paul Masson and Catherine Pattillo, “Monetary Union in West Africa:An Agency of Restraint for Fiscal Policies?” IMF Working Paper 01/34, 2001; and Paul Masson and Catherine Pattillo, Monetary Union in West Africa (ECOWAS), IMF Occasional Paper No. 204, 2001. Appendix II in the latter paper also provides a concise and useful survey of existing and failed currency unions across the world.


Dominique M. Guillaume and David Stasavage, “Improving Policy Credibility: Is There a Case for African Monetary Unions?” World Development, vol. 28, No. 8, pp. 1391–07 (August 2000).


Tamim Bayoumi and Jonathan Ostry, “Macroeconomic Shocks and Trade Flows Within Sub-Saharan Africa: Implications for Optimum Currency Arrangements,” Journal of African Economies, 1997, Vol. 6. pp. 412–44.

External Publications of the IMF Staff

A full listing of external publications of IMF staff in the second half of 2001 will appear in the next issue of this bulletin. A searchable database with updated information on recent external publications of IMF staff is available at the Research at the IMF website at

Visiting Scholars at the IMF, July–September 2001

Michael Bleaney; University of Nottingham, U.K.

Michael Bordo; Rutgers University

John Boyd; University of Minnesota

Kevin Carey; American University

Menzie Chinn; University of California at Santa Cruz

Carl Claussen; Central Bank of Norway, Norway

Rebecca Coke; Belmont University

Giancarlo Corsetti; University of Rome III, Italy

Thomas Cosimano; University of Notre Dame

Allan Drazen; University of Maryland

Jayasri Dutta; University of Birmingham

Michael Funke; Universitat Hamburg, Germany

Pietro Garibaldi; Università Commerciale Luigi Bocconi, Italy

Morris Goldstein; Institute for International Economics

Cheikh Gueye; BCEAO, Senegal

Gregory Hess; Oberlin College

Shigeru Iwata; University of Kansas

Mahmood Khan; Simon Fraser University

Amartya Lahiri; University of California at Los Angeles

Francois Leroux; Ecole des Hautes Etudes Commerciales, France

George Mbangah; University of Yaounde II, Cameroon

Emmanuel Ogunkola; National University of Lesotho, Lesotho

Andrew Rose; University of California at Berkeley

Xavier Sala-I-Martin; Universitat Pompeu Fabra, Spain

Fondoh Sikod; University of Yaounde II, Cameroon

Mark Taylor; Warwick Business School, U.K.

Juergen von Hagen; University of Bonn, Germany

Shang-Jin Wei; Brookings Institution

Thomas Willett; Claremont Graduate University

Yishay Yafeh; The Hebrew University, Israel

Eduardo Yeyati; Universidad Torcuato di Tella, Argentina

IMF Research Bulletin, December 2001
Author: International Monetary Fund. Research Dept.