Was a common, multinational currency ever a good idea? We looked into it.
“The main argument against currency unions is the loss of member countries’ independence to tailor monetary policy to their local needs. But Mundell suggested that three conditions reduce the cost of relinquishing monetary independence – similarity of the economic shocks that members experience; wage and price flexibility; and mobility of capital and labour. These conditions tilt the policy choice in favour of a currency union.
Until very recently, there has been little progress in the empirical assessment of the costs and benefits of joining a currency union. Indeed, 40 years after Mundell’s seminal paper, Andrew Rose (2000) would present the first systematic attempt to quantify the effect of currency unions on trade. Rose estimated that sharing a common currency increased bilateral trade between countries by over 200%. This result was received with some skepticism, and a large number of papers, including some by Rose himself, investigated the robustness of the initial finding.”
Read all about it in the latest issue of Carnet Atlantique!