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Currency Areas and International Assistance

Author

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  • Tim Worrall

    (University of Manchester.)

  • Pierre M Picard

    (University of Luxembourg and CORE, Université Catholique de Louvain, Louvain-la-Neuve.)

Abstract

This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the standard result.

Suggested Citation

  • Tim Worrall & Pierre M Picard, 2009. "Currency Areas and International Assistance," 2009 Meeting Papers 903, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:903
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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