This paper develops an analytical model to evaluate the costs and benefits of a single currency area within a unified framework, inspired by the separate arguments of Mundell (1961) and (1973). The more familiar argument is that, in the presence of country-specific shocks, a single currency area...

The paper evaluates the costs and benefits of a single currency area within a unified framework. Conventionally, it is argued that a single currency area carries a welfare loss owing to the sacrifice of exchange rate adjustment in the presence of country-specific shocks. But in 1973 Mundell...