Voting on the Adoption of a Common Currency

Two countries adopting a common currency share the same monetary policy and save on transaction costs. This paper studies the impact of these two factors on the composition of markets. The establishment of a monetary union alters the boundaries between domestic and international markets and triggers distributional effects, creating disagreement among citizens over the desirability of the union. The outcome of a referendum on the choice between national currencies and monetary union depends on the country's level of development, suggesting that a common currency will be favoured by a majority of traders in both countries only at a particular stage.