Unit 6

Apuntes

Unit 6 International economic collaboration Monetary unions The costs of a common Currency • The costs of a monetary union derive from the fact that when a country relinquishes its national currency, it also relinquishes an instrument of economic policy, i.e. it loses the ability to conduct a national monetary policy. • In other words, in a full monetary union the national central bank either ceases to exist or will have no real power. • This implies that a nation joining a monetary union will no longer be able to change the price of its currency (by devaluations and revaluations), to determine the quantity of the national money in circulation, or to change the short-term interest rate. Grauw, Ch. 1 Shifts in demand in a monetary unión (point 1) Let suppose France and Germany form a monetary union (they have abandoned their national currencies and use a common currency, the euro, which is managed by a common central bank, the European Central Bank) and for some reason consumers shift their preferences away from French-made to German-made products Grauw, Ch. 1 Shifts in demand in a monetary union (cont’d) • The result of these demand shifts, then, is that output declines...