In the decade following the introduction of the euro, many Southern EMU members experienced sizeable capital inflows. We document how, instead of contributing to convergence, these flows mainly fueled growth of the nontradable sectors. We rationalize these developments using a tractable...

This paper studies monetary regime choice between monetary union and flexible exchange rate regime in a large open economy framework. The classical approach emphasizes that monetary unions are inherently costly because a single interest rate cannot respond effectively to different shocks of...