A stochastic simulation model of an optimum currency area

Michel Beine, Frédéric Docquier

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Abstract

In this paper, we develop a two-country stochastic simulation model based on the theory of optimum currency areas, which studies the desirability of a monetary union. Extending the general equilibrium model of Ricci (1995), we introduce the intertemporal dimension, which allows to deal more accurately with labor mobility and shock dynamics. We analyse the importance of shocks asymmetries and investigate the role of labor mobility. Furthermore, we illustrate the influence of trade openness and the impact of a fiscal federalism system, assuming a specific transfer allocation rule based on the relative evolution of unemployment between the two countries.

Original languageEnglish
Pages (from-to)227-255
Number of pages29
JournalOpen Economies Review
Volume9
Issue number3
Publication statusPublished - 1998

Keywords

  • Fiscal federalism
  • International labor mobility
  • Optimum currency area

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  • Cite this

    Beine, M., & Docquier, F. (1998). A stochastic simulation model of an optimum currency area. Open Economies Review, 9(3), 227-255.