The Impact of Common Currencies on Financial Markets: A Literature Review and Evidence from the Euro Area release_hv6q4lmjarhyhde5at2g447ew4

Abstract

This paper reviews both the theoretical and empirical literature on the impact of common currencies on financial markets and evaluates the first three years of experience with Economic and Monetary Union (EMU). If we assume that multiple currencies prevent national financial markets from integrating, a currency union can improve welfare by (i) encouraging international risk diversion through private portfolio diversification, and (ii) improving growth performance by allowing for riskier, higher-quality, more long-run investment. EMU has encouraged integration among the still fairly fragmented European financial markets both directly and indirectly. When applying the European experience to a potential North American monetary union, one should consider that the U.S. and Canadian financial markets are already more integrated than the European ones, and thus the potential gains in terms of greater financial market integration from a common currency in North America may be more moderate than in Europe.
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