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Do Common Currencies Facilitate the Net Flow of Capital Among Countries?

Jul 2007
Working Paper
337
Slavi T. Slavov

Earlier studies have hypothesized that membership in a common currency arrangement (either a currency union or a currency board) is associated with a lower correlation of participants’ saving and investment rates, and a greater dispersion in their current account balances. This paper examines a panel of 128 countries over the period 1976-2005, and finds that common currencies loosen the correlation between national saving and investment, but only if the adopting country is in Europe, or has a relatively high per-capita income. I also find that the current account balances of common currency participants around the world are more highly correlated with fundamental factors than the current accounts of non-participants. Overall, the evidence does suggest that common currencies facilitate cross-country net capital flows and relax countries’ current account constraints. Monetary integration facilitates the more efficient allocation of capital around the world.

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