EU306 lecture slides6 - Benefits of a Common Currency Costs...

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Benefits of a Common Currency Costs have to do with macroeconomic management of the economy Benefits have to do with the microeconomic aspect Eliminating national currencies for a common currency leads to economic efficiency gains - Elimination of transaction costs - Elimination of exchange rate risk
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Benefits of a Common Currency (cont.) 1. Direct gains from the elimination of transaction costs Eliminating the costs of exchanging one currency into another is themost visible gain from a monetary union E.C. Estimates these gains between €13-20 billion/year Of course banks will lose revenue they get for exchanging national currencies in a monetary union
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Benefits of a Common Currency (cont.) 1. Indirect gains from the elimination of transaction costs The scope for price discrimination between national markets will be reduced (TABLE HERE) The unification of currency along with the other measures in creating a single market will make price discrimination more difficult This is a benefit to the European consumer
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Benefits of a Common Currency (cont.) 1. Welfare gains from less uncertainty The uncertainty about future exchange rate cahnges introduces uncertainty about future firm revenues Welfare of firms will increase when common currency is introduced (exception: firms taht make money by taking on risk)
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Benefits of a Common Currency (cont.) 1. Exchange Rate Uncertainty and the Price Mechanism Exchange rate uncertainty introduces uncertainty about the future prices of goods and services Movement towards a common currency will eliminate the exchange risk and lead to a more efficient working of the price mechanism
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Benefits of a Common Currency (cont.) 1. Exchange Rate Uncertainty and Economic Growth The elimination of the exchange risk will lead to an increase in economic growth (the EC argument) However, this view lacks empirical data
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Benefits of a Common Currency (cont.) 1. Benefits of An International Currency - When countries form a monetary union the new currency will likely weigh more in international monetary relations than the sum of individual currencies prior to the Union - The currency is likely to find use outside of the union This creates additional benefits to the union: - Issuer of currency obtains additional revenues - It will boost activity for domestic financial markets (foreign residents will want to invest – this creates know-how and jobs & financial institutions will have new opportunities
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Benefits of a Common Currency (cont.) 1. Benefits of a Monetary Union and the Openness of Countries - The welfare gains of a monetary union are likely to increase with the degree of openness of an economy - Ex: elimination of transaction costs will benefit those countries that buy and sell a large number of goods and services in foreign countries - With an increasing openness towards the other partners in the Union, the gains from a monetary union (per uniot of output increases)
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Costs and Benefits Compared
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EU306 lecture slides6 - Benefits of a Common Currency Costs...

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