Chapter 12: When You Got Nothing, You Got Nothing to Lose – Regional Monetary Integration and Policy Independence
* J. James Reade and Ulrich Volz When you got nothing, you got nothing to lose. Bob Dylan in “Like a Rolling Stone”, from the album Highway 61 Revisited 12.1 INTRODUCTION A central tenet of the literature on monetary integration and unification that is repeated like a mantra is that the costs of the latter are to be seen in the loss of monetary independence. The theory of optimum currency areas, which still guides economists’ thinking about monetary integration, maintains that countries that join a currency area by fixing their exchange rate to another currency (or even adopting another currency) will lose their monetary policy autonomy, and discussions are framed in terms of these costs. Countries that experience similar economic cycles and shocks, or which have adjustment mechanisms other than monetary policy or exchange rate revaluations to respond to idiosyncratic shocks, such as flexible labour markets, are hence deemed good candidates for a common currency area. In this chapter we do not seek to examine what constitutes an optimal currency area or which countries are good or bad candidates for joining it.1 Instead, we want to take a step back and reconsider the cost–benefit calculus of monetary integration relating to monetary policy autonomy. There is no question that a country that joins a monetary union will have to relinquish monetary sovereignty; but whether it loses monetary policy independence, that is, the ability to conduct its own monetary policy according to the developments of the domestic economy, is not clear per...
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