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By Peter B. Kenen

This publication surveys the customers for neighborhood financial integration in quite a few elements of the realm. starting with a quick assessment of the idea of optimum foreign money components, it is going directly to study the constitution and functioning of the ecu financial Union, then turns to the clients for financial integration in other places on the earth - North the United States, South the US, and East Asia. Such cooperation might take the shape of full-fledged financial unions or looser kinds of financial cooperation. The ebook emphasizes the commercial and institutional necessities for profitable financial integration, together with the necessity for a unmarried imperative financial institution in relation to a full-fledged financial union and the corresponding want for multinational associations to shield the bank's independence and guarantee its responsibility. The e-book concludes with a bankruptcy at the implications of economic integration for the U.S. and the U.S. buck.

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Regional Monetary Integration

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In a full-fledged monetary union, the two may have the same number of seats on the central bank’s governing body. But the small Western economy will weigh less heavily in the unionwide aggregates and averages on which the governing body bases its decisions. If indeed the West is very much smaller than the East, it may well find it hard to choose between a monetary union with the East and the unilateral adoption of the Eastern currency. THE BENEFITS OF CURRENCY CONSOLIDATION What can a country gain by entering a monetary union or adopting another country’s currency?

But this will exacerbate the situation in the West, where the switch in demand will reduce output and employment, and the tightening of Eastern monetary policy will reduce them further. 11 Alesina and Barro (2002) obtain a similar result using a more sophisticated model. They also show that the West should be able to “bribe” the East to include the Western economy in the policy domain of the Eastern central bank; the resulting gain to the West will exceed the cost to the East. ) Advocates of dollarization are, of course, entitled to reply that the second-best outcome obtained in the text may be superior to the best result that the West can obtain on its own, without de jure dollarization.

What happens, then, with perfect capital mobility? As there can then be just one monetary policy in a currency union, we have to ask who makes that monetary policy and the nature of its policy domain. The Crucial Role of the Policy Domain Suppose that the West decides unilaterally to adopt the Eastern currency and thereby to import the monetary policy of the Eastern central bank. The Eastern central bank, however, does what the Federal Reserve has done despite de jure dollarization by other countries.

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