Small country benefits from monetary union

• Published in: Journal of policy modeling Vol. 27; no. 4; pp. 509 - 523
• Main Author: Grubel, Herbert
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.06.2005; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Policy Modeling
• Subjects: Benefits and costs of monetary unions; Central banks; Currencies; Economic Development; Economic policy; European Union; Hard fixing; Monetary Policy; Monetary unions; Money; National monetary sovereignty; Prices; Sovereignty; Studies; Hard fixing; National monetary sovereignty; Benefits and costs of monetary unions
• ISSN: 0161-8938; 1873-8060
• DOI: 10.1016/j.jpolmod.2005.04.015

The paper reviews the technical methods available for the hard fixing of currencies and presents evidence from studies of the benefits and costs from monetary unions achieved through hard fixing. The main costs are alleged to arise from the loss of national monetary sovereignty. In fact, these costs are much smaller than is argued traditionally since the exercise of this sovereignty has historically been responsible for many economic shocks. The costs are also shown to be lowered by efficient capital and labor markets that are endogenous to the adoption of hard currency fixes. The paper focuses on the discussion of a neglected benefit of hard fixing, which is that small countries enjoy better monetary policy. The improved monetary policy arises because the large institutions to which they surrender their monetary sovereignty are more likely to be free from political influences and partly because they have more financial and human resources to design and execute the best monetary policy. Errors made by the large central banks have less impact on the member countries they serve because of the dominance of intra-union trade and capital flows.