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  5. Optimal Payment Areas or Optimal Currency Areas?

AEA Papers and Proceedings

ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)

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Optimal Payment Areas or Optimal Currency Areas?

  • Patrick Bolton
  • Haizhou Huang
AEA Papers and Proceedings
vol. 108, May 2018
(pp. 505–08)
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Abstract

We use the Optimal Capital Structure of Nations framework in Bolton and Huang (2018) to develop a new theory of Optimum Currency Areas. Whether two economically integrated nations should form an optimal currency area depends on a trade-off between financial flexibility (the value of monetary sovereignty) and monetary discipline (the commitment not to engage in competitive monetizations). We show that a monetary union works best when combined with a fiscal union and fiscal transfers. We also show that debt monetization is still desirable in a monetary union when both member-countries simultaneously face a negative output shock.

Citation

Bolton, Patrick, and Haizhou Huang. 2018. "Optimal Payment Areas or Optimal Currency Areas?" AEA Papers and Proceedings, 108: 505–08. DOI: 10.1257/pandp.20181058

Additional Materials

JEL Classification

  • E62 Fiscal Policy
  • F33 International Monetary Arrangements and Institutions
  • F45 Macroeconomic Issues of Monetary Unions