Euroland and East Asia in a Dollar-Based International Monetary System: Mundell Revisited
Ronald I. McKinnon
August 9, 1999 Robert Mundell's long standing enthusiasm for European monetary unification was vindicated by the formal advent of the euro on January 1, 1999. For almost 30 years, he has seen clearly that the advantages of a common European currency would swamp any disadvantages. But therein lies a paradox. The fierce scholarly debate for more than a decade before EMU's advent on whether a one-size-fits-all monetary policy was appropriate for Europe pitted politicians, who on the continent were mainly in favor, against economists, who generally were much more doubtful. And the doubters who opposed EMU used arguments drawn from Mundell's own work! Specifically, his classic article, "The Theory of Optimum Currency Currency Areas (1961) comes down against a one-size-fits-all monetary policy-and seems to argue in favor of making currency areas smaller rather than larger. In this paper, I will first present some doctrinal history to resolve the paradox and better explain Mundell's position today. Second, I will look at how the new euro and the dollar can best co-exist-given the latter's traditional role as international money. Third, in the absence of an "Asian euro", I will argue for a common monetary standard in East Asia based on the dollar.
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