Unilateral currency union with a high-income area : the case of Montenegro

Unilateral euroization by developing economies is underexplored even in comparison to unilateral dollarization (taken to mean the adoption of the US dollar as legal tender). This paper attempts to help fill this gap in the literature by investigating the case of Montenegro, which is one of the two countries/regions that have unilaterally adopted the euro as the legal tender. Montenegro's limited monetary policy options make the nature of business cycles important. The evidence presented here suggests that Montenegro has a low degree of synchronization, limited structural similarity, and weak trade integration with the Eurozone. Moreover, there is little evidence for diversification or endogenous structural assimilation following euroization. The case for currency union is weak for Montenegro and appears to be defensible only on grounds of policy credibility. This has important implications for euroization, development policy, and structural change.