Abstract
This paper proposes the creation of a common currency for the industrialized democracies, notably the United States, the European Union, and Japan. A common currency implies a common monetary policy; institutional arrangements for which are discussed. The rationale rests on the assumption that asymmetrical financial shocks will become more important than asymmetrical real shocks for these large, diversified economies, and that one of the growing sources of financial shocks will be changing expectations about exchange rate movements among national currencies. These financial shocks will in turn disturb real economies, such that flexible exchange rates among major currencies will increasingly become sources of shock more than shock absorbers. Such a common currency would also make it much easier for emerging markets to frame their monetary and exchange rate policies.
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Notes
Under anti-dumping regulations agreed in the Uruguay Round, a firm whose home currency has appreciated must adjust its foreign prices to the change within 60 days to avoid being charged with dumping; de minimus margins for dumping, including “dumping” produced by changes in exchange rates, are only two percent. In short, the anti-dumping rules expose normal business practice of list pricing to foreign customers to protectionist action in the presence of routine movements in exchange rates.
Gros (1999) is more skeptical that dollar–euro exchange-rate volatility will be higher than pre-1999 dollar–DM volatility.
In discussing international coordination of policies Keynes (1930) suggested that all major countries target the same index of prices of a basket of internationally traded commodities, ranging from aluminum to zinc. Concretely, writing under a gold standard, he suggested adjusting the official conversion price of gold periodically to maintain its value in terms of an index of 62 commodities — the equivalent of targeting price stability of the index.
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Cooper, R.N. Proposal for a common currency among rich democracies. IEEP 3, 387–394 (2006). https://doi.org/10.1007/s10368-006-0062-4
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DOI: https://doi.org/10.1007/s10368-006-0062-4