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The Security of Money and the Determinants of International Monetary Integration

The Security of Money and the Determinants of International Monetary Integration. Patrick Leblond International Political Economy Society Conference Princeton University 17-18 November 2006. Research Question.

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The Security of Money and the Determinants of International Monetary Integration

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  1. The Security of Money and the Determinants of International Monetary Integration Patrick Leblond International Political Economy Society Conference Princeton University 17-18 November 2006 © 2006. Patrick Leblond. All rights reserved.

  2. Research Question • Why do states, or rather, their governments decide to participate (and stay) in international monetary integration (IMI) arrangements? © 2006. Patrick Leblond. All rights reserved.

  3. Context • Predictions that the world is moving towards global monetary consolidation • Mundell • Rogoff • But no good theories explaining international monetary integration • Optimum currency area • Focus mainly on one factor • EMU • Explanations are not generalizable • Cohen (1998, 2004) has made a valiant effort • But some of his concepts remain vague and hard to measure • Nothing about the relative importance of factors • No systematic test © 2006. Patrick Leblond. All rights reserved.

  4. Defining IMI • When the exchange rate between the currencies of two or more states is irrevocably fixed so that one country’s money is perfectly exchangeable for that of another member country at a fixed price • Unilateral IMI • Multilateral IMI (the focus of this paper) © 2006. Patrick Leblond. All rights reserved.

  5. Argument: IMI and The Security of Money • Ultimate goal of a government: • Stay in power • Economic growth & employment • Fight off internal and external challenges • Benefits of IMI • Lower transaction costs related to international trade • Costs of IMI • Asymmetric economic cycles • Common monetary policy • Loss of seigniorage to finance government spending • War • Public order © 2006. Patrick Leblond. All rights reserved.

  6. Bilateral Trade + + Business Cycle Synchronicity + Int’l Monetary Integration + Peace + Domestic Stability Hypotheses (1) The Security of Money © 2006. Patrick Leblond. All rights reserved.

  7. Bilateral Trade + + + (Stable) Democracy Business Cycle Synchronicity + + Int’l Monetary Integration + + Peace + Domestic Stability Hypotheses (2) © 2006. Patrick Leblond. All rights reserved.

  8. IMI and Regime Type in 2004 © 2006. Patrick Leblond. All rights reserved.

  9. Statistical Model © 2006. Patrick Leblond. All rights reserved.

  10. © 2006. Patrick Leblond. All rights reserved.

  11. © 2006. Patrick Leblond. All rights reserved.

  12. Contributions • General theoretical framework for explaining the political decision for or against IMI • Focus on the political role of money • The security of money • First econometric test • First comparative analysis of IMI cases and non-cases • Framework to predict future monetary integration around the globe (or its absence) © 2006. Patrick Leblond. All rights reserved.

  13. Limit to the Analysis: The Role of Third Party States(Regional Hegemony or Leadership) • Omitted variable? • Found to be important in international economic integration • Krasner (1976) and Mattli (1999) • May bias the estimated coefficients, especially for regime type • May explain why stable autocracies are more likely than stable democracies to participate in IMI arrangements © 2006. Patrick Leblond. All rights reserved.

  14. Bilateral Trade + + + Business Cycle Synchronicity + (Mature) Democracy + Int’l Monetary Integration + + Peace + + + Regional Hegemon Domestic Stability + + Other Side Payment A More Appropriate Model? © 2006. Patrick Leblond. All rights reserved.

  15. Next Steps • Mesure third-party influence on the benefits and costs of IMI participation and incorporate it into the analysis • Work out more clearly what is necessary from what is sufficient • Test for sustainability of IMI participation © 2006. Patrick Leblond. All rights reserved.

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