Comments on Optimal Currency Areas by Alesina, Barro, and Tenreyro

What's Here Currency unions are all the rage in international policy circles these days. But suppose a country – say Argentina (the usual crisis de jour) – decides that it needs to adopt a foreign currency. Which one should it pick? Alesina, Barro and Tenreyro provide the methodology, or at least most of it, to answer this important and interesting question. Their methodology is reasonable in a number of aspects. First, it is based on solid but standard theory. Second, it seems to yield mostly sensible results in practice. And third, the authors deal with the endogeneity issue carefully; that is, the potential ex post effect of currency union itself on the criteria used to judge the ex ante desirability of currency union. They focus on three key issues: 1) the benefits from enhanced international trade that currency unions bring; 2) the low inflation that clients get from joining a currency union with a low-inflation anchor; and 3) the potential effects of currency union on price and output co-movements, which