Skip to content Skip to navigation

Do Common Currencies Facilitate the Net Flow of Capital Among Countries?

Jul 2007
Working Paper
Slavi T. Slavov

Earlier studies have hypothesized that membership in a common currency arrangement (either a currency union or a currency board) is associated with a lower correlation of participants’ saving and investment rates, and a greater dispersion in their current account balances. This paper examines a panel of 128 countries over the period 1976-2005, and finds that common currencies loosen the correlation between national saving and investment, but only if the adopting country is in Europe, or has a relatively high per-capita income. I also find that the current account balances of common currency participants around the world are more highly correlated with fundamental factors than the current accounts of non-participants. Overall, the evidence does suggest that common currencies facilitate cross-country net capital flows and relax countries’ current account constraints. Monetary integration facilitates the more efficient allocation of capital around the world.

Geographic Regions: