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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 15, No. 4, pp.529-553
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2002
Received 29 May 2003 Revised 15 Oct 2003

Transaction Costs and Welfare Effects of Currency Unions

Jai-won Ryou
Professor, Department of Economics, Konkuk University, 1 Hwayang- dong, Gwangjin-gu, Seoul, 143-701, Korea, Tel: +82-2-450-3621, Fax: +82-2-3436-6610 govjai@konkuk.ac.kr

JEL Classification: F33, F36, F42

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.

Keywords:

Currency Union, Transaction costs, East Asian monetary integration, New open economy macroeconomics

Acknowledgments

I appreciate support of Professors Koichi Hamada, Christopher Udry and David G. Pearce during my visit to Economic Growth Center of Yale University. I also thank anonymous referees of this Journal for their helpful comments.

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