Currency Unions, Optimal Currency Areas and the Integration of Financial Markets: Central Europe from the Fourteenth to the Sixteenth Centuries

Abstract

This paper employs a new method and dataset to estimate the effect of currency unions on the integration of financial markets in late medieval Central Europe. The analysis reveals that membership of a union strongly and significantly correlated with wellintegrated markets. We also examine whether currency unions were endogenous. Our results indicate that markets were significantly better integrated prior to the formation of a union. In addition, we show that currency unions established by autonomous merchant towns were better integrated than unions implemented by territorial rulers. The overall implication is that late medieval Central European monetary diversity was a corollary of weakly integrated markets.