4.4.5—Monetary union
- Syllabus
- First assessment 2022
- Objective
- 4.4.5
- Level
- SL
A monetary union trades flexibility for lower transaction costs
A monetary union uses one currency and a common monetary policy across its members. It removes exchange-rate uncertainty and conversion costs, and can deepen trade and financial integration.
The trade-off is the loss of an independent interest rate and exchange rate. If one member enters a recession while another overheats, a single policy rate may fit neither. Fiscal transfers, labour mobility and similar economic structures can help absorb asymmetric shocks, but they are not automatic.