If the real exchange rate follows approximately a random walk and in the presence of nontraded goods, a monetary union may generate a Pareto improvement. The argument is based on the analogy with the advantages that derive from the formation of a customs union. A novel unit roots test based on the arc sine law is advanced.

customs unions, exchange rates, international monetary policy, monetary unions
dx.doi.org/10.1016/0378-4266(90)90018-W, hdl.handle.net/1765/12432
Journal of Banking & Finance
Erasmus School of Economics

van Marrewijk, J.G.M, & de Vries, C.G. (1990). The customs union argument for a monetary union. Journal of Banking & Finance, 877–887. doi:10.1016/0378-4266(90)90018-W