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The Minimum Economic Dividend for Joining a Currency Union

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  • Michele Ca’ Zorzi
  • Roberto A. De Santis
  • Fabrizio Zampolli

Abstract

A two-country model is developed to show how the optimality of a currency union depends on whether it brings an economic dividend in terms of potential growth and the Balassa-Samuelson (BS) effect (the steady appreciation of the real exchange rate due to cross-country differences in intersectoral productivity gaps). The model shows that such dividend needs to be larger, the higher the BS effect, the smaller the size of the economy, the larger the cross-country difference in the standard deviation of the supply shocks, the smaller their correlation and the larger the standard deviation of real exchange rate shocks. We calibrate the model to quantify such dividend as a function of plausible ranges of the parameter values. The results suggest that both the BS effect and the size of real exchange rate shocks play a key role in evaluating the optimality of accessing the currency union.
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Suggested Citation

  • Michele Ca’ Zorzi & Roberto A. De Santis & Fabrizio Zampolli, 2012. "The Minimum Economic Dividend for Joining a Currency Union," German Economic Review, Verein für Socialpolitik, vol. 13(2), pages 127-141, May.
    • Handle: RePEc:bla:germec:v:13:y:2012:i:2:p:127-141
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    Cited by:

    1. Alexandra Ferreira-Lopes, 2014. "The Welfare Cost of the EMU for Transition Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2014(4), pages 446-473.
    2. Elena Angelini & Michele Ca’ Zorzi & Katrin Forster van Aerssen, 2016. "External and Macroeconomic Adjustment in the Larger Euro-Area Countries," International Finance, Wiley Blackwell, vol. 19(3), pages 269-291, December.

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