Independent Currency Unions, Growth, and Inflation

Abstract

During the last few years, there has been a renewed interest in currency unions. This is the result both of the recent wave of currency crises as well as the implementation of the euro. In this paper, the authors use panel data for 1970-98 to investigate economic performance under historical independent currency unions (ICUs) along three dimensions: GDP per capital growth, growth volatility, and inflation. They use a treatment effects model that estimates jointly the probability of having a common currency and its effect on performance. The authors find that ICU countries have had a significantly lower rate of inflation, but macroeconomic volatility has been higher. Also, ICU countries have grown faster than with currency nations, but the East Caribbean Currency Area countries are found to be the driving force behind this result.