Several countries in the world have accepted the currency union, which is a term that is not different from the economy of each.
However, considering that money management is so variable, it is sometimes better to have monetary support to avoid inflation or, at some point, the economy collapses.
The currency union is an agreement between countries in which the unification of the currency is agreed upon to increase the stable investment model based on goods and services.
The member countries of a monetary union share almost all economic policy at the macroeconomic level since a standard monetary policy requires a certain level of homogeneity in fiscal policy. For this reason, monetary unions such as the Eurozone have certain levels of a public deficit as entry requirements, among other conditions.
By joining a monetary union, member countries cede part of their sovereignty to the central bank in charge of issuing the common currency and setting monetary policy.
Types of Monetary Union
Depending on the degree of Monetary Union achieved by the group of countries, we can distinguish three different Unions:
Informal Union: it consists of a country unilaterally accepting the use of a foreign currency, yielding its monetary policy to this foreign country, such as, for example, Panama, whose currency is the US dollar.
Formal union: consists of an agreement between countries bilaterally, such as, for example, the
Common Monetary Union, which adopted the euro.
Formal union with standard Monetary Policy: this agreement will establish an Institution that will be in charge of setting monetary policy, such as, for example, the European Union with the European Central Bank.
To what extent do monetary unions facilitate international trade?
To assess the trade effect of currency unions, researchers generally rely on a standard gravity equation framework and insert a simple currency union dummy as a right-hand regressor. This produces a single coefficient to assess the trade effect of currency unions.
By construction, this effect is homogeneous in all the pairs of countries of the monetary union of the sample. Researchers have often found significant consequences, and by structure, these apply equally to all bilateral couples in the model in a currency union. But the results are not always precise, as they can vary significantly between samples.
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