CURRENCY AREAS, INTERNATIONAL MONETARY REGIMES, AND THE EMPLOYMENT-INFLATION TRADEOFF

We show that the employment-inflation tradeoff facing a central bank d epends on the size of the economy for which it sets monetary policy. F or inflation-averse central banks, the tradeoff improves the smaller t he relevant economy. The tradeoff facing the region whose central bank controls the exchange rate in a managed exchange rate regime does not change moving to a symmetric flexible exchange rate regime. Instead, the core region in an asymmetric regime faces a worse tradeoff than un der flexible exchange rates. Equipped with these results, we explore t he issue of the optimal size of a currency area both in a two and in a three-region world. (C) 1998 Elsevier Science B.V.