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dc.contributor.authorCorsetti, Giancarloen_US
dc.contributor.authorPesenti, Paoloen_US
dc.date.accessioned2012-08-17T14:29:22Z-
dc.date.available2012-08-17T14:29:22Z-
dc.date.issued2002en_US
dc.identifier.urihttp://hdl.handle.net/10419/60716-
dc.description.abstractA currency area can be a self-validating optimal policy regime, even when monetary unification does not foster real economic integration and intra-industry trade. In our model, firms choose the optimal degree of exchange rate pass-through to export prices while accounting for expected monetary policies, and monetary authorities choose optimal policy rules while taking firms' pass-through as given. We show that there exist two equilibria, each of which defines a self-validating currency regime. In the first, firms preset prices in domestic currency and let prices in foreign currency be determined by the law of one price. Optimal policy rules then target the domestic output gap, and floating exchange rates support the flex-price allocation. In the second equilibrium, firms preset prices in consumer currency, and a monetary union is the optimal policy choice for all countries. Although a common currency helps synchronize business cycles across countries, flexible exchange rates deliver a superior welfare outcome.en_US
dc.language.isoengen_US
dc.publisherFederal Reserve Bank of New York New York, NYen_US
dc.relation.ispartofseriesStaff Report, Federal Reserve Bank of New York 152en_US
dc.subject.jelE5en_US
dc.subject.jelF4en_US
dc.subject.ddc330en_US
dc.subject.keywordoptimum currency areas, monetary union, optimal cyclical monetary policy, nominal rigidities, exchange rate pass-throughen_US
dc.subject.stwOptimaler Währungsraumen_US
dc.subject.stwExchange Rate Pass-Throughen_US
dc.subject.stwTheorieen_US
dc.titleSelf-validating optimum currency areasen_US
dc.typeWorking Paperen_US
dc.identifier.ppn354400932en_US
dc.rightshttp://www.econstor.eu/dspace/Nutzungsbedingungenen_US
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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