Costs and Benefits of Monetary Union: A Pedagogical Note

Abstract

The primary motivation for establishing a monetary union (MU) derives from the desire to deepen an existing regional integration arrangement. This study examined the costs and benefits of MU. Generally, the benefits of MU accrue from macroeconomic efficiency gains such as reduced transactions costs; increased competition; reduced risks and uncertainty; and policy credibility enhancement. However, the costs relate largely to the macroeconomic management difficulties occasioned by loss of national monetary and exchange rate policy autonomy.
Given a range of structural differences among countries contemplating the establishment of a MU, it is advisable for each to conduct a cost-benefit analysis or delay the decision to join until appropriate convergence criteria are met and an explicit cost-benefit sharing scheme designed. The benefits of monetary union are most effectively exploited when all the other key ingredients of economic integration have already been established and fully functioning.