Keynesian Economics and Price Theory by Masayuki Otaki

Author:Masayuki Otaki
Language: eng
Format: epub
Publisher: Springer Japan, Tokyo

7.4 The Difficulty of Constituting a Currency Area in Reality

In the previous section, optimism in relation to the incentive for coordination between the two countries was expressed. However, as Hamada (1981, Chap. 3) argues, historical evidence suggests that political unification generally advances before monetary integration. This implies that monetary integration is more difficult than political unification, because the return from issuing money is exorbitant as such.

In reality, there is no movement towards political unification even in European Union countries. As will be discussed in Chap. 8, the Eurozone is far from an optimum currency area , and might be regarded as countries that have adopted a fixed exchange rate system in which the nominal exchange rate is at unity and non-adjustable. As a result, imbalances in the current accounts between Euro countries provoke serious political-economic problems. Nevertheless, it should be noted that such imbalances always exist within a country, and in a sense are regarded as compensation for maintaining the unification of a country. Thus, although the Euro might aim at the economic unification of European countries, unless creditor countries become more patient, such unification will not easily be accomplished, nor will true monetary integration be achieved.

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