DP2659 Currency Unions and International Integration

Author(s): Charles M Engel , Andrew K Rose

Publication Date: January 2001

Keyword(s): Common , Optimum , Currency , Area , Empirical , Trade , Price , Business Cycle

JEL(s): F15 , F33

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2659.asp

This Paper characterizes the integration patterns of international currency unions (such as the CFA Franc zone and the East Caribbean Currency Area). We empirically explore different features of currency unions, and compare them both to countries with sovereign monies, and to regions within nations. We ask: are countries within international currency unions as integrated as regions within political unions? We do this by examining the criteria for Mundell’s concept of an optimum currency area. We find that members of currency unions are more integrated than countries with their own currencies, but less integrated than regions within a country. For instance, we find that currency union members have more trade and less volatile real exchange rates than countries with their own monies, but less trade and more volatile exchange rates than regions within individual countries. Similarly, business cycles are more highly synchronized across currency union countries than across countries with sovereign monies, but not as synchronized as regions of a single country. Finally, currency union membership is not associated with significantly greater risk sharing, though risk sharing is widespread within countries.