Stability and Growth Pact Gave the Maastricht Treaty Criteria and Its Advantages and Disadvantages - Literature review Example

The paper “Stability and Growth Pact Gave the Maastricht Treaty Criteria and Its Advantages and Disadvantages” is a sage example of macro & microeconomics literature review. According to Robert Mundells’ contribution to the theory of optimal currency areas, a monetary union is a more competent method to organize an indemnity scheme were to manage with asymmetric jolts than a system of national currencies with uncertainty in exchange rates. There are automatic inflows of capital and better insurance against risk in a monetary union, and thus, less effect of temporary asymmetric shocks.

Mundells has the view that a monetary union offers microeconomic advantages since it minimizes microeconomic vagueness, and also it saves the cost to the participants of a monetary union.These monetary advantages augment in relation to the volume of trade and with the intensity of economic integration. As for the cost of the monetary union, it emanates from the savings in loss of the exchange rate as a fine-tuning variable to soothe the aggregate demand. (Quere et al 2010:390). Further, Exchange rate movements are liable to be a basis of asymmetric shocks and Mundell's approach found the monetary union as a mode to condense asymmetric shocks and enhance insurance against them (Quere et al 2010:390).

As per Mundells, elimination of Transaction costs will be the direct gains whereas price transparency will be the indirect gain.Many empirical studies have shown that there will be many gains from a monetary union and one of the main benefits will be the elimination of exchange rate transaction costs as there will be a reduction in the size of price discrimination between national markets. (Llirjani 2006:73). According to Taylor (2005), transaction costs will include savings in currency conversion charges, reduction in bank commissions, charges, and delays linked with cross-border payments by banks.

As per an EU study, the elimination of transaction costs involving conversion of one currency into another is likely to enhance the GDP of the nations concerned by an aggregate of 0.4% for the EU as a whole per annum. (Macdonald 1999:201).A single monetary union will help to attain lower transaction costs as there will be no commission on foreign exchange transactions and there will be an elimination of costs of hedging the exchange rate risk.