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Small Countries in Monetary Unions: A Two-Tier Model

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  • Jorge Braga de Macedo

Abstract

In a previous analysis of the West African Monetary Union, Macedo(1985a), size is taken to be a major structural characteristic of a country in the sense that large countries are not affected by disturbances originating in small countries but small countries are affected by large countries' domestic disturbances. In this paper, we generalize some of the results and present the structure of the model in moredetail. Using a four-country, two-tier macroeconomic model, it is shown that the pseudo-exchange rate union of the two small countries with the large partner has no effect on their real exchange rates but affects their price levels, whereas a full monetary union requires in principle a transfer from the large partner in the union. The allocation of this transfer between the two small countries by their common central bank will have real effects when the allocation rule differs from the steady-state monetary distribution.

Suggested Citation

  • Jorge Braga de Macedo, 1985. "Small Countries in Monetary Unions: A Two-Tier Model," NBER Working Papers 1634, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1634
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    1. Jorge Braga de Macedo, 1986. "Collective Pegging to a Single Currency: The West African Monetary Union," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 333-368, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Carrera, Jorge Eduardo, 1995. "Efectos precio y comercio en un area monetaria asimetrica [Price and trade effects in an asymmetric monetary area]," MPRA Paper 7844, University Library of Munich, Germany.

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