5. Effectiveness of devaluation as a function of
openness
Very open country Relatively closed country
PO PC
SO
SC
DO
DC
YC
YO
6. Can Ireland reach a more attractive
(lower) inflation equilibrium?
Germany Ireland
E
G
C F
A
UG UI
Fixing the exchange rate of the Punt with the Dmark is not credible, because Irish
authorities have an incentive to create surprise inflation (devaluation)
8. “An optimum currency
area is a group of
countries for whom
it is optimal to adopt
a common currency
and form a currency
union.”
See http://faculty.haas.berkeley.edu/arose/ABTFinalNBER.pdf
9. 1. Labour Mobility
2. Production Diversification
3. Openness
4. Fiscal Transfers
5. Homogeneous Preferences
6. Commonality of Destiny