Abstract
One of the arguments for a monetary union is that it reduces the variability of exchange rates. This paper demonstrates that the welfare gain that EU countries can expect to gain from the move to a single currency is moderate. The gains from exchange rate stabilization are limited by imports of foreign consumption goods and borrowing by governments. Furthermore, exchange rate stabilization may imply a welfare loss as the removal of non-zero exchange rate expectations
deprives investors of the opportunity to speculate on expected-rate-of-return differentials. Numerical simulations suggest that the welfare gain from exchange rate stabilization for the average EU country is equivalent to a 0.9 percent rate of return on portfolio wealth.
deprives investors of the opportunity to speculate on expected-rate-of-return differentials. Numerical simulations suggest that the welfare gain from exchange rate stabilization for the average EU country is equivalent to a 0.9 percent rate of return on portfolio wealth.
Original language | English |
---|---|
Pages (from-to) | 309-329 |
Journal | Empirica: Journal of applied economics and economic policy |
Volume | 25 |
Issue number | 3 |
DOIs | |
Publication status | Published - 1997 |
Externally published | Yes |