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Journal of Economic Integration 2006 March;21(1) :157-180.
The Costs and Benefits of Monetary Integration Reconsidered: towards Value-Added Based Openness Measures

Ansgar BelkeLars Wang 

University of Hohenheim
Copyright ©2006 Journal of Economic Integration

This study re-assesses regional integration by taking new measures for the degree of openness into account. The value-added based economic integration (VEI) model which improves on traditional economic integration models forms the core of these openness indicators. We show that a shift from the usual proxies of the gross economic integration (GEI) model towards those of the VEI model leads to a decrease of the realized degree of economic integration. Hence, the costs (benefits) are higher (lower) for a country from joining a fixed exchange rate area as supposed by the standard GEI model. From this perspective, the outcomes based on the traditional GEI model tend to overestimate the potential success of a given monetary integration process. More specifically, even a revision of the recommendation for a country to participate in a single currency area might be a consequence. Finally, empirical estimates of these new openness measures are delivered for more than twenty countries.

JEL classifications: C67, E20, F15, F42

Keywords: Degree of economic integration | Exchange rate arrangement | Openness | Optimum currency areas | Value-added approach
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