Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities

Topics:
Commercial Banking
Tags:
Currency,
Externality,
IMF,
Network,
Networking
Source:
International Monetary Fund

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Overview: This paper builds a dynamic stochastic model-based on network externalities operating through trade channels-to explain the emergence of currency blocs, and specifically, why some countries join a currency union earlier than others. The paper develops and formalizes the intuition that currency bloc formation is path dependent, and that countries join currency blocs sooner the more they trade with the bloc member countries, with each additional member serving in a dynamic way to attract more members into the bloc.

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Format: PDF | Size: 432KB | Date: Nov 2004 | Pages: 36

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