1. © 2006. Patrick Leblond. All rights reserved. The Security of Money and the Determinants of International Monetary Integration Patrick Leblond International Political Economy Society Conference Princeton University 17-18 November 2006

2. © 2006. Patrick Leblond. All rights reserved. 2 Research Question Why do states, or rather, their governments decide to participate (and stay) in international monetary integration (IMI) arrangements? Why do states, or rather, their governments decide to participate (and stay) in international monetary integration (IMI) arrangements?

3. © 2006. Patrick Leblond. All rights reserved. 3 Context Predictions that the world is moving towards global monetary consolidation Predictions that the world is moving towards global monetary consolidation Mundell Mundell Rogoff Rogoff But no good theories explaining international monetary integration But no good theories explaining international monetary integration Optimum currency area Optimum currency area Focus mainly on one factor Focus mainly on one factor EMU EMU Explanations are not generalizable Explanations are not generalizable Cohen (1998, 2004) has made a valiant effort Cohen (1998, 2004) has made a valiant effort But some of his concepts remain vague and hard to measure But some of his concepts remain vague and hard to measure Nothing about the relative importance of factors Nothing about the relative importance of factors No systematic test No systematic test

4. © 2006. Patrick Leblond. All rights reserved. 4 Defining IMI When the exchange rate between the currencies of two or more states is irrevocably fixed so that one country’s money is perfectly exchangeable for that of another member country at a fixed price When the exchange rate between the currencies of two or more states is irrevocably fixed so that one country’s money is perfectly exchangeable for that of another member country at a fixed price Unilateral IMI Unilateral IMI Multilateral IMI (the focus of this paper) Multilateral IMI (the focus of this paper)

5. © 2006. Patrick Leblond. All rights reserved. 5 Argument: IMI and The Security of Money Ultimate goal of a government: Ultimate goal of a government: Stay in power Stay in power Economic growth & employment Economic growth & employment Fight off internal and external challenges Fight off internal and external challenges Benefits of IMI Benefits of IMI Lower transaction costs related to international trade Lower transaction costs related to international trade Costs of IMI Costs of IMI Asymmetric economic cycles Asymmetric economic cycles Common monetary policy Common monetary policy Loss of seigniorage to finance government spending Loss of seigniorage to finance government spending War War Public order Public order

6. © 2006. Patrick Leblond. All rights reserved. 6 Bilateral Trade Int’l Monetary Integration Peace Domestic Stability Business Cycle Synchronicity + + + + + Hypotheses (1) The Security of Money

7. © 2006. Patrick Leblond. All rights reserved. 7 Bilateral Trade Int’l Monetary Integration (Stable) Democracy Peace Domestic Stability Business Cycle Synchronicity + ++ + + + + + Hypotheses (2)

8. © 2006. Patrick Leblond. All rights reserved. 8 IMI and Regime Type in 2004

9. © 2006. Patrick Leblond. All rights reserved. 9 Statistical Model

10. © 2006. Patrick Leblond. All rights reserved. 10

11. © 2006. Patrick Leblond. All rights reserved. 11

12. © 2006. Patrick Leblond. All rights reserved. 12 Contributions General theoretical framework for explaining the political decision for or against IMI General theoretical framework for explaining the political decision for or against IMI Focus on the political role of money Focus on the political role of money The security of money The security of money First econometric test First econometric test First comparative analysis of IMI cases and non- cases First comparative analysis of IMI cases and non- cases Framework to predict future monetary integration around the globe (or its absence) Framework to predict future monetary integration around the globe (or its absence)

13. © 2006. Patrick Leblond. All rights reserved. 13 Limit to the Analysis: The Role of Third Party States (Regional Hegemony or Leadership) Omitted variable? Omitted variable? Found to be important in international economic integration Found to be important in international economic integration Krasner (1976) and Mattli (1999) Krasner (1976) and Mattli (1999) May bias the estimated coefficients, especially for regime type May bias the estimated coefficients, especially for regime type May explain why stable autocracies are more likely than stable democracies to participate in IMI arrangements May explain why stable autocracies are more likely than stable democracies to participate in IMI arrangements

14. © 2006. Patrick Leblond. All rights reserved. 14 A More Appropriate Model? Regional Hegemon Bilateral Trade Int’l Monetary Integration (Mature) Democracy Peace Domestic Stability Business Cycle Synchronicity + ++ ++ + + + + + Other Side Payment + +

15. © 2006. Patrick Leblond. All rights reserved. 15 Next Steps Mesure third-party influence on the benefits and costs of IMI participation and incorporate it into the analysis Mesure third-party influence on the benefits and costs of IMI participation and incorporate it into the analysis Work out more clearly what is necessary from what is sufficient Work out more clearly what is necessary from what is sufficient Test for sustainability of IMI participation Test for sustainability of IMI participation