Ec4333 Lecture5 2007
11
Lecture 5 Costs of Single Currency OCA Theory Cool Example
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Transcript of Ec4333 Lecture5 2007
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Effectiveness of devaluation as a function of openness
Very open country Relatively closed country
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Can Ireland reach a more attractive (lower) inflation equilibrium?
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Germany Ireland
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Fixing the exchange rate of the Punt with the Dmark is not credible, because Irish authorities have an incentive to create surprise inflation (devaluation)
“An optimum currency area is a group of countries for whom it is optimal to adopt a common currency and form a currency union.”
See http://faculty.haas.berkeley.edu/arose/ABTFinalNBER.pdf
1. Labour Mobility
2. Production Diversification
3. Openness
4. Fiscal Transfers
5. Homogeneous Preferences
6. Commonality of Destiny