Regional currency areas and the use of foreign currencies

Arrangements that replace independent national currencies (regional currency areas, currency boards, official or unofficial use of a foreign currency) have become increasingly popular. However, they raise at least three broad questions. First, do their benefits (notably lower transactions costs) exceed the costs (reduced policy flexibility)? Second, which of these regimes is most suitable for a particular economy? Third, must institutions be developed to ensure economic convergence and other complementary measures that will guarantee the success of a common currency, or are convergence and complementary measures a likely consequence of adopting a common currency? Senior central bankers from Africa, Asia, Europe, the Middle East and the United States discussed experiences and research on these questions at a two-day meeting held at the BIS in September 2002. The first day focused on economic issues and the second on legal and practical issues.