Monetary Unions and Long-Run Growth

Abstract

This paper develops two complementary models of monetary unions and long-run growth. The key result is that a reduction in foreign exchange costs via monetary unification provides a positive growth effect for member nations. This growth effect may come through increased knowledge spillovers in the deterministic model or through the migration of funds to higher-yield investments in the stochastic model. Empirical evidence is presented that generally supports both of these channels of growth.