A global currency?

A question from Yahoo! Answers:

How can entire globe follow one currency system?

That’s not the right question. The right question is, SHOULD the entire globe follow one financial system? And the answer to that is no.

A common currency may be beneficial for a group of nations if they (1) trade a lot with each other, (2) tend to respond similarly to external shocks (such as, for example, change in oil prices or the dollar-yen exchange rate), (3) have substantial international (within the proposed common currency area) mobility of labor, (4) have substantial international (within the proposed common currency area) mobility of capital, and (5) have a common tax and transfer system. If most of these conditions are not met, common currency will do more harm than good.

Sources:

  • Mundell, R.A. (1961), “A Theory of Optimum Currency Areas”, American Economic Review 51: 657-665.
  • McKinnon, R.I. (1963), “Optimum Currency Areas”, American Economic Review 53, 717-724.
  • Kenen, P. B. (1969), “The Theory of Optimum Currency Areas: An Eclectic View”, in Mundell, R.A. and Swoboda, A.K. (eds.), Monetary Problems of the International Economy (Chicago: University of Chicago Press).
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