Liquidity and Currency Competition under a Single Currency: Differences in the Transmission of Shocks *

This paper is a heuristic calibration that helps in the understanding of the changes occurring after the introduction of a single currency system. The shapes of impulse response to shocks are compared with those in the national currency system. A unified-currency open economy model shows that currency unification changes the transmission mechanism of a real shock in one country to another country. Under the single currency arrangements, by currency competition, a country with favorable real shock absorbs money that is an important factor in a cash-in-advance constrained world, causing negative impact to the other country. However, this does not happen in the national currency regime.