Transaction Costs and Welfare Effects of Currency Unions

Abstract

This paper analyzes the economic integration effects of forming a regional currency bloc by focusing on the efficiency gains that come from using a common currency. Particularly, this paper analyzes welfare effects of a currency union using the new open economy macroeconomics framework. A common currency boosts intra-regional trade, but decreases inter-regional trade. Accordingly, a currency block increases output and income of participating countries, but decreases those of non-member countries. In this context, regional monetary integration in East Asia will make East Asian countries in the currency union better off at the expense of non-participating countries.