Optimal currency areas and customs unions: are they connected?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 25 November 1998

Working paper No. 89
By Marion Kohler

This paper examines the link between currency unions and customs unions. The size of a bloc of countries practising some form of co-ordination of monetary policy is limited by the incentive to free-ride that formation of the bloc creates. However, when the threat of a trade war is introduced, the stable size of the bloc increases. This suggests that a) large currency areas are more likely to emerge where it combines with a customs union and b) that the stability of both currency area and customs union is closely related, as the threat of tariff penalties can enforce monetary co-operation.

PDFOptimal currency areas and customs unions: are they connected?

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