Own Currency vs. Shared Currency

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Sources

Q1 – OECD – To What Extent Do Exchange Rates and their Volatility Affect Trade? https://www.oecd-ilibrary.org/to-what-extent-do-exchange-rates-and-their-volatility-affect-trade_5kg3slm7b8hg.pdf

Last accessed: 22.08.2026

"Simply stated, depreciation of a country's currency makes its exports cheaper and its imports more costly."

"Since a devaluation or depreciation of the exchange rate implies a reduction in the price of exports, the quantity exported will increase. At the same time, the price of imports will rise and their quantity demanded will diminish."

"If an exchange rate depreciation makes exports of final products 'cheaper,' it makes imported components 'more expensive' for domestic producers."

"It is suggested that the cost of conversion from one currency to another and the risk associated with potential changes in exchange rates have a dampening effect on trade flows."

"risk-averse firms will attempt to hedge against future exchange rate movements. They thus apply a risk premium in terms of a mark-up to cover the costs of exchange rate movements. Such higher prices exert a negative effect on demand, production and consumption."

"Although exchange rate hedging mechanisms are available, they are probably somewhat prohibitive for some particularly small and medium-sized enterprises, who may have less long-term visibility of their foreign exchange needs."

"the use of hedging exists, but that it entails some costs and limitations such as the difficulty for firms to foresee the volume and timing of their international transactions."

Q2 – U.S. Bureau of Labor Statistics – How currency appreciation can impact prices: the rise of the U.S. dollar https://www.bls.gov/opub/btn/volume-12/how-currency-appreciation-can-impact-prices-the-rise-of-the-us-dollar.htm

Last accessed: 22.08.2026

"currency depreciation (when the value decreases over time) translates to higher import prices."

"A currency appreciation (when the value increases over time) results in a lower effective price for imported goods."

"As a result of a stronger dollar, import goods became relatively cheaper as fewer dollars were needed to pay the same price in other currencies."

"Import and export price indexes reveal these price impacts on imports to and exports from the United States."

"The value of a currency is an important determinant for prices in international trade."

"When the value of a currency changes, prices for goods traded using that currency can be affected."

"As a result of interest rates rising throughout 2022, the value of the U.S. dollar also increased compared with other currencies, making the U.S. dollar attractive to global investors."

"Around the world, investors sell other currencies to purchase U.S. dollars, in turn strengthening the dollar while weakening other currencies."

Q3 – National Bureau of Economic Research – Optimal Currency Area: A 20th Century Idea For the 21st Century? https://www.nber.org/system/files/working_papers/w22097/w22097.pdf

Last accessed: 22.08.2026

"In similar circumstances, countries with a national currency adjust by large depreciations, facilitating a painful but fast adjustment and thereby mitigating the recessionary effects of banking crises."

"conditions favoring keeping the national currency and exchange-rate flexibility included a low labor mobility across borders, the absence of supranational tax-cum-transfer mechanisms, a high degree of nominal rigidity in domestic prices, a low degree of openness to trade, and dissimilarities in national economic structures."

"such a currency union also implies the inability to use monetary policy to deal with a real and financial crisis impacting union members as well with external shocks that change the exchange rates between global currencies."

"A currency union of developing countries anchored to a leading global currency stabilizes inflation at a cost of inhibiting the use of monetary policy to deal with real and financial shocks."

"the odds of a successful currency area depend on the viability of effective institutions and policies dealing with adjustment to asymmetric financial and real shocks that impact its members."

"Tighter unions may offer enough pooling mechanisms that provide sufficient insurance to increase the stability of a union."

"countries with closer trade links tend to have more tightly correlated business cycles."

"countries are more likely to satisfy the criteria for entry into a currency union after taking steps toward economic integration rather than before."

"in the phase of deepening financial ties, countries may end up with more correlated business cycles and deeper trade among its members."

Q4 – International Journal of Central Banking – Asymmetric Shocks and Monetary Policy in the Euro Area https://www.ijcb.org/journal/v22n3/asymmetric-shocks-and-monetary-policy-euro-area

Last accessed: 22.08.2026

"we distinguish between symmetric shocks, which affect countries similarly, and asymmetric shocks, which cause diverging movements across countries."

"We analyze the role of asymmetric macroeconomic shocks for conduct of monetary policy of the euro area, as a monetary union."

"global symmetric shocks predominantly drive business cycles in most euro-area countries."

"we also find empirical support for the optimum currency area (OCA) endogeneity hypothesis: upon adopting the euro, new member countries, on average, experience faster convergence in their share of symmetric shocks relative to the euro-area aggregate."

Q5 – Econlib (Concise Encyclopedia of Economics) – Monetary Union https://www.econlib.org/library/Enc/MonetaryUnion.html

Last accessed: 22.08.2026

"Countries whose governments control their own money supply typically use monetary policy to influence the level of activity in the country's economy."

"Adjusting the money supply is a common tool for managing overall economic activity in a country (see monetary policy), and changes in the money supply also affect the financing of government budgets. So giving up control of a national money supply introduces new limitations on a country's economic policies."

"Because a monetary union has only one money, it must agree on a single monetary policy to address the business cycles of multiple countries."

"How costly this loss is depends on institutional features of the particular countries involved."

"To the degree that exchange-rate variability tends to discourage the volume of trade and investment, this can provide a rationale for stabilizing the exchange rate."

"Regarding trade, most empirical estimates are close enough to zero to question if there is any effect; regarding investment, estimates conflict as to whether the effect is positive or negative."

"it also eliminates the need for merchants to exchange currencies and pay the associated transactions costs."

"Second, a monetary union eliminates the transactions costs people incur when they need to exchange currencies in carrying out international transactions."

"One benefit is that merchants no longer need worry about unexpected movements in the exchange rate."

"A monetary union, like any fixed-exchange-rate regime, eliminates this risk."

"One effect is to promote international trade among members of the monetary union."

"Empirical evidence indicates that while simply reducing exchange-rate uncertainty may not noticeably affect trade, adopting a fully common currency can raise trade much more—approximately doubling it according to several estimates."

"If Germany and Italy tend to have recessions at the same time, they can agree more often on a single monetary policy that accommodates the needs of both countries simultaneously."

"Even if Germany has a recession when Italy has a boom, this asymmetry can be accommodated if newly unemployed Germans move to Italy to take the newly vacant positions."

"Another way to mitigate this asymmetry is if Italy transfers income to help support unemployed Germans during Germany's recessions, and vice versa during times of recession in Italy."

"Further, the federal fiscal system permits compensation across state lines."

"Economists have estimated that for every dollar lost in one region relative to another in a recent recession, up to thirty-five cents were transferred to the losing region from the rest of the country, in terms of lower income taxes paid to the federal government and extra unemployment benefits received."

"there is significant labor mobility, with around 3 percent of the U.S. population moving from one state to another annually."

"By contrast, there is relatively little labor mobility between European countries."

"Only about 1 percent of Germans and Italians relocate annually between regions within their own countries, and even fewer move between the two countries."

"As yet, most taxes and fiscal expenditures are conducted at the national level, and so there is limited opportunity for cross-country compensation."

"Further, European countries have more distinct business cycles than those observed between U.S. regions."

"It may be that business cycles will become more synchronized across Europe as trade linkages increase, or that labor mobility or fiscal federalism (EU transfers of wealth from one EU country to another) will develop over time."

Q6 – European Commission (DG ECFIN) – Hedging and invoicing strategies to reduce exchange rate exposure: a euro-area perspective https://ec.europa.eu/economy_finance/publications/pages/publication11475_en.pdf

Last accessed: 22.08.2026

"Domestic-currency invoicing and hedging allow internationally active firms to reduce their exposure to exchange rate variations."

"transaction risk refers to the impact of exchange rate changes on the value of committed cash flows (cash flows that lie in the future, but the nominal value of which is known)."

"economic risk refers to the impact of exchange rate movements on the present value of uncertain future cash flows."

"translation risk refers to the impact of exchange rate changes on the valuation of foreign assets (mainly foreign subsidiaries) and liabilities on a multinational company's consolidated balance sheet."

"Exchange rate risk can also be neutralised ('hedged') through financial instruments, such as exchange rate derivatives or foreign currency debt (financial hedges), as well as through the operational setup of the exporting firm (operational hedges)."

"When exports are invoiced in domestic currency, the (short-term) exchange rate risk is borne by the importer rather than by the exporter."

"By invoicing in domestic currency, an exporter is able to shift transaction risk to his customer abroad."

"Financial derivatives have today become standard tools for hedging risks related to exchange rates, interest rates or commodities prices."

"Transaction risk can be easily hedged using standard products (in particular forwards)."

"Hedging becomes more difficult for the longer term, because the cash flow may be uncertain (economic risk)."

"Operational hedges, as non-financial natural hedges, involve geographical diversification of production, sourcing and/or sales."

"Underhedging means that part of the underlying cash flow is not covered against exchange rate risk."

"the introduction of the single currency, which abolished exchange rate risk among euro-area Member States."

Q7 – ECB – The impact of the euro on trade: two decades into monetary union https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op283~a2ff6f5481.en.pdf

Last accessed: 22.08.2026

"a common currency would bring the benefits of reducing transaction costs, removing nominal exchange rate volatility and hedging costs, and increasing price transparency across countries."

"By decreasing transaction costs, a European common currency should in principle facilitate trade."

The conditions for an optimum currency area include the existence of price and wage flexibility, mobility of input factors, financial and fiscal integration, similarity of inflation rates and business cycle synchronisation.

"Although there was general consensus prior to the introduction of the euro on the fact that the euro area was not yet fulfilling all of these conditions, it was also believed that the introduction of a common currency could boost trade and contribute to creating an optimum currency area ex post."

"the euro has facilitated trade creation, business cycle synchronisation and the emergence of value chains within the euro area."

"To the extent that the euro facilitates the emergence of GVCs within the euro area, EMU can indeed be considered a key factor reinforcing OCA endogeneity."

"In this sense, the euro area has come closer to being an OCA as described in the seminal paper by Mundell (1961) and subsequent literature."

"The Single Market and monetary integration are key factors behind the increasing trade openness of the euro area."

Q8 – RIETI – One Currency, Diverse Economies https://www.rieti.go.jp/en/columns/a01_0349.html

Last accessed: 22.08.2026

"which eliminates the costs of foreign exchange transactions and risk associated with exchange rate fluctuations."

"Monetary integration—which eliminates the costs of foreign exchange transactions and risk associated with exchange rate fluctuations—facilitates trade, producing the same effects as those achieved by eliminating trade barriers such as import tariffs and regulatory obstacles."

"Countries with their own currencies have their own macroeconomic adjustment tools, namely, independent monetary and exchange rate policies, and monetary integration means losing independent control over such policies."

"a set of countries is better fit for monetary integration when the similarities of the economies, the unity of goods and labor markets, flexibility in price adjustment, and fiscal mobility across national boundaries are greater, because the need for macroeconomic adjustment will be lower."

"Continued divergence in inflation rates across euro zone countries over a long period of time pushed up the real exchange rates of countries with higher inflation rates, widening disparities in export competitiveness and expanding trade and current account imbalances within the euro zone."

"Restoring competitiveness by nominal devaluation is not an option."

"countries with weak economies need to adjust their real exchange rates by bringing down the prices."

"This, however, is no easy task for these countries where productivity remains low and prices are inflexible."

"Furthermore, cross-border labor mobility within the EU remains limited. With member countries differing not only in language but also in social security systems, those residing in other EU member countries other than their own account for only 2.8% of the total work-age population (European Commission, 2012)."

"those residing in other EU member countries other than their own account for only 2.8% of the total work-age Population."

Q9 – International Monetary Fund – Deciding to Enter a Monetary Union: The Role of Trade and Financial Linkages https://www.imf.org/en/publications/wp/issues/2016/12/31/deciding-to-enter-a-monetary-union-therole-of-trade-and-financial-linkages-40033

Last accessed: 22.08.2026

"The welfare calculation suggests two ways to preserve the welfare gains in a monetary union: ensuring fiscal and financial stability that reduces macroeconomic country risk, and increasing wage flexibility such that the economy adjusts to external shocks faster."

"This paper evaluates the role of trade and financial linkages in the decision to enter a monetary union."

"The reduction of trade costs generates a net welfare gain of 0.9 percent of life-time consumption, while the increased interest rate spread volatility generates a net welfare cost of 2.9 percentage points."

Q10 – University of Cambridge, Judge Institute of Management – One Market, One Money, One Price? Price Dispersion in the European Union https://www.jbs.cam.ac.uk/wp-content/uploads/2020/08/wp0501.pdf

Last accessed on: 23.08.2026

"A common currency eliminates transaction costs and exchange rate risks and through price transparency increases trade and competition, thereby contributing to lower price dispersion after adjusting for transport costs."

"Although comparisons of prices between countries need only basic calculations, the psychological effect of using a different yardstick could be large and potentially inhibiting."

"The EMU has the potential to remove exchange rate risk, transaction costs and the veil over price transparency."

Q11 – European Central Bank – Exchange rate pass-through in the euro area and EU countries https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op241~c7c3080d60.en.pdf

Last accessed on: 23.08.2026

"It refers to the degree to which a country's import, producer or consumer prices change in response to a change in its exchange rate."

"it is the percentage change in prices in response to a 1% change in the exchange rate."

"Typically, the sensitivity to the exchange rate declines along the price distribution chain: from import prices through producer prices to final consumer prices."

"It is highest and fastest for import prices at the border, but significantly smaller and relatively slower for final consumer prices."

"a 1% depreciation in the euro raises total import prices in the euro area and its member countries on average by around 0.3% within a year, and the headline HICP by around 0.04%."

"the ERPT to consumer prices is around one-tenth of the ERPT to import prices."

"a 1% depreciation in the euro effective exchange rate raises total import prices (including intra-euro area trade) within one year by 0.3% to 0.8%. It declines along the pricing chain and has a less than 0.1% upward impact on headline HICP inflation."

"For non-euro area EU Member States, the ERPT to consumer prices is of a similar magnitude, while that to import prices is somewhat higher, ranging between 0.4% and 0.8%."

"Aggregate exchange rate pass-through (ERPT) to import and consumer prices in the EU is currently lower than it was in the 1990s and is non-linear."

"The ERPT to euro area import and consumer prices is also found to be non-linear – it is stronger for large exchange rate changes than small ones."

"the ERPT to total import prices and consumer prices has been stable since the 1990s and lower than estimates obtained in the literature for earlier decades."

"Increased participation in global value chains (GVCs), larger market shares of exporters to euro area countries and euro area imports invoiced in euro (local currency pricing) reduce ERPT to import prices."

"Credible and aggressive monetary policy reduces the observed ex post ERPT, as agents expect monetary policy to counteract deviations of inflation from target, including those relating to exchange rate fluctuations."

"the pass-through of exchange rate changes depends on the nature of the shock that caused the appreciation or depreciation in the first place."

"The channel through which imports enter the consumption basket is essential to determining the profile of the exchange rate transmission to consumer prices."

the retail price of the internationally tradable good P _t ^F _r is different from the border price P _t ^F because of a wedge caused by local distribution costs: p̑ _t ^F _r = p̑ _t ^F + ηp̑ _t

where η > 0 is a non-tradable bundle used to distribute the tradable good to the domestic consumers and firms.

"the ERPT is the difference between the dynamic path of prices (or inflation) with and without the exchange rate change."

"This formulation allows a distinction to be made between short-run or impact pass-through and long-run pass-through, which empirically is typically set at two to three years."

"Interestingly, OECD data show that there is a strongly positive correlation between the import content of exports and trade openness, such that the direct impact of import prices on consumption prices is not necessarily larger for very open economies than for economies relying less on international trade."