Most of the nearly two hundred countries in the world today have their own currency, which fits with the conventional view that each country is supposed to have its own money. For smaller countries, this setup usually entails the use of another country's money, such as the U.S. dollar or the euro. As the editors of Currency Unions (Hoover Press, 2001) explain, however, the concept of "one country, one currency" has been called into question.
Spurred by the adoption of the euro, countries have become more willing to consider the idea of a currency union, in which more than one economy shares a common money, note Currency Unions coeditor and Hoover fellow Robert J. Barro and coeditor Alberto Alesina in their introduction to the book. Thus, the discussion has shifted toward one of desirable forms and sizes of currency unions.
In May 2000, about two dozen economists assembled at the Hoover Institution to consider basic conceptual issues about currency unions. Currency Unions summarizes the conference papers. The contributors—all experts on international monetary policy—provide theoretical analyses of currency unions and other monetary regimes, including flexible and fixed exchange rates. The papers also assess the available empirical evidence on the performance of these alternative monetary systems. The authors then draw some policy conclusions on the desirability of currency unions for countries in various circumstances.
Currency Unions reviews the traditional case for flexible exchange rates, namely, that it allows for an independent monetary policy. The usual view is that this policy should be countercyclical—expansionary during recessions and contractionary in booms—and thus help to insulate an economy from terms-of-trade shocks.
Currency Unions also looks at the pitfalls of flexible exchange rates and why fixed rates—particularly full dollarization—might be a more sensible choice for some emerging-market countries. Additionally, the contributors detail the factors that determine the optimal sizes of currency unions, explain how a currency union can expand the volume of international trade among its members, and examine the recent implementation of dollarization in Ecuador.
Robert J. Barro is a senior fellow at the Hoover Institution and the Robert C. Waggoner Professor of Economics at Harvard University.
Alberto Alesina is a professor of economics and government at Harvard University, with a specialty in political economy.
The Hoover Institution, founded at Stanford University in 1919 by Herbert Hoover, who went on to become the 31st president of the United States, is an interdisciplinary research center for advanced study on domestic and international affairs.
