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Central Banking, Monetary Theory and Practice

Essays in Honour of Charles Goodhart, Volume One

Edited by Paul Mizen

Celebrating the contribution that Charles Goodhart has made to monetary economics and policy, this unique compendium of original papers draws together a highly respected group of international academics, central bankers and financial market regulators covering a broad range of issues in modern monetary economics. Topics discussed include: central bank independence; credibility and transparency; the inflation forecast and the loss function; monetary policy experiences in the US and the UK; the implications of Goodhart’s Law; the benefits of single versus multiple currencies; and money, near monies and credit.
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Chapter 9: A cost of unified currency

Nobuhiro Kiyotaki and John Moore


9. A cost of unified currency Nobuhiro Kiyotaki and John Moore* 1. INTRODUCTION Until recently, Charles and I (Kiyotaki) taught a graduate monetary economics course together. Charles usually taught first in the autumn, and then I taught in the spring. The course was a popular one. The students seemed both to enjoy and to get puzzled by the contrast between us, in content and style. When students put questions to Charles, he always had answers. When they put questions to me, I often had to ask myself, ‘Do I know the answer?’ This short chapter, written jointly with John Moore, is in part the result of such a question. The question can be phrased: ‘In a hypothetical world where there are no country-specific macroeconomic shocks and so no need for independent stabilization policy, is having a unified currency always better than having separate national currencies?’ A standard argument for separate currencies is that each country can pursue an independent monetary policy for stabilizing its national economy (assuming that monetary policy can and should stabilize an economy). A usual argument for currency unification is that it stimulates the trade of goods, services and assets. Thus it looks obvious that, if there is no need for independent stabilization, a unified currency would be better. But is it so obvious? We would like to present a counterexample. The environment we have in mind is a world with many types of goods and many types of people....

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