payments union

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An arrangement by two or more countries to pool their foreign exchange reserves. The advantage of this is that it reduces the total reserves they need to hold, and sets them free to trade with one another without worrying about the effects on their reserves. The disadvantage is that they need to entrust their monetary policy to a combined central bank, or to agree on coordinated monetary policies. Unless this is done, there is a potential conflict between individual and group incentives.

Subjects: Economics.

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