ECON 424 Study Guide - Comprehensive Final Exam Guide - Xpression Fm, Ordinary Least Squares, Old Testament
20 Nov 2018
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Criteria for applying optimum currency area: small size and openness. Small countries must trade because they do not have the resources to produce everything (geographically constrained) Since they must stay opened to trade (and trade a lot), fixing the exchange rate removes exchange rate fluctuations which would affect and economy that must trade a lot more: symmetry of shocks. Two party trading experience the same shock: labor mobility. Remittances (money) would flow between the 2 countries and affect the exchange rate if currencies are different. Adopt one currency to solve it (aka european union: fiscal transfers in a federal system. Focus on monetary policy (p stability), less of fiscal. P(cid:396)i(cid:272)e sta(cid:271)ility did(cid:374)"t e(cid:374)su(cid:396)e (cid:373)a(cid:272)(cid:396)oe(cid:272)o(cid:374) sta(cid:271)ility (cid:894)lo(cid:449) i(cid:374)flatio(cid:374)(cid:895) Now: monetary policy (p stability) ajd macroprudential policies (financial stability) Goal of macro-prudential policy: curb risk-taking and overleveraging in economy. Needed bc monetary policy can be constraining (zero lower bound)
