MMP Blog #29: What about a country that adopts a foreign currency? Part Two
There was never a strong argument for adopting the Euro, and the weaknesses have been exposed. Currency union without fiscal union was a mistake.
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There was never a strong argument for adopting the Euro, and the weaknesses have been exposed. Currency union without fiscal union was a mistake.
Even if the government ties its hands behind its back and its shoes together, it makes no difference – the balance sheets still balance.
A country might choose to use a foreign currency for domestic policy purposes. Here, however, we are examining a nation that does not issue a currency at all.
A country that floats its exchange rate can enjoy domestic policy independence and free capital flows. A country that pegs its exchange rate must choose to regulate capital flows or must abandon domestic policy independence.
We will look to the frequent claim that the US is “special”—while it might be able to run persistent government deficits and trade deficits, other countries cannot.