A DSGE Model of Trade and Risk-Sharing Effects of Currency Union on Economic Integration of the CFA Zone

This article explores currency regulation in the EAEU countries for the harmonization of currency policies in the context of economic integration. The object of the study is currency regulation in countries of Eurasian integration. The main hypothesis is that EAEU member countries are not ready for currency integration, due to the presence of many macroeconomic distortions in their economies. The authors assess the possibility of creating a monetary union by analyzing and evaluating key criteria for currency integration as known in the scholarly literature. For this goal, the authors conducted a literature review of the key prerequisites for currency integration, including the experience in the countries of the Eurozone. Then the authors analyze currency regulation in EAEU countries for meeting key criteria for currency integration. At this stage, the authors evaluate key factors of currency integration by EAEU member countries. The theoretical and methodological basis of the study was classic and modern approaches in the field of monetary and currency regulation—in particular, the research of modern analysts of the International Monetary Fund, the largest Central Banks of the world, and well-known experts of the field. The research results showed the inexpediency of creating a currency union within the Euroasian economic space at this stage.

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Fiscal Unions

The American Economic Review ◽

10.1257/aer.20130817 ◽

2017 ◽

Vol 107 (12) ◽

pp. 3788-3834 ◽

Cited By ~ 43

Author(s):

Emmanuel Farhi ◽

Iván Werning

Keyword(s):

Financial Markets ◽

Open Economy ◽

Risk Sharing ◽

Capital Controls ◽

Currency Union ◽

Country Risk ◽

Currency Unions ◽

Fiscal Union ◽

Cross Country ◽

Optimal Risk Sharing

We study cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities and provide two key results. First, we show that if financial markets are incomplete, the value of gaining access to any given level of aggregate risk sharing is greater for countries that are members of a currency union. Second, we show that even if financial markets are complete, privately optimal risk sharing is constrained inefficient. A role emerges for government intervention in risk sharing both to guarantee its existence and to influence its operation. The constrained efficient risk-sharing arrangement can be implemented by contingent transfers within a fiscal union. We find that the benefits of such a fiscal union are larger, the more asymmetric the shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies. Finally, we compare the performance of fiscal unions and of other macroeconomic stabilization instruments available in currency unions such as capital controls, government spending, fiscal deficits, and redistribution. (JEL E62, F31, F32, F41, F45)

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