In theory, it could work like the planned European economic and monetary union that calls for the creation of a single central bank that will issue a common currency to be used by all participating countries. Or, as with Luxembourg and Belgium's monetary union , it could involve a small nation effectively adopting the currency of a larger one and not having its own central bank. Monetary union theoretically offers the advantages of having a currency that can be used world-wide. With a widely accepted currency, business can be conducted more efficiently and at lower cost. To be sure, neither course is a panacea.
Studies indicate that excessive exchange-rate volatility can retard investment and trade.
The key to successful monetary unification is hitching your currency to that of a country with close economic ties and a similar business cycle. Otherwise, what is good monetary policy for the smaller country may not be the policy of the larger one. The debate isn't over. Inc. All Rights Reserved.