Electronic Money and the Optimal Size of Monetary Unions

Claudia Costa Storti and Paul De Grauwe

in Monetary Unions and Hard Pegs

Published in print March 2004 | ISBN: 9780199271405
Published online August 2004 | e-ISBN: 9780191601200 | DOI:
 Electronic Money and the Optimal Size of Monetary Unions

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The question is how the advent of electronic money affects the size of optimal currency areas. In particular, we study whether currencies of small countries will tend to disappear as a result of electronic money. The three major forces that will be at work during the transition to a cashless society have different implications for the question at hand. These forces are (a) raising the potential for financial instability during the transition, (b) giving rise to new monetary network externalities that affect the costs and benefits of national media of exchange, and (c) leading to the emergence of new stores of value.

Keywords: currency competition; electronic money; financial instability; network externalities; optimal size of monetary unions; transaction costs

Chapter.  6200 words.  Illustrated.

Subjects: Economic Systems

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