What three factors determine whether two economies with separate fiscal and monetary authorities should form a currency union?

Answer 1

Three key factors that determine whether two economies should form a currency union are economic similarity, trade integration, and the ability to manage asymmetric shocks. Economic similarity, such as comparable inflation rates and growth patterns, suggests that a common monetary policy would be effective for both economies. High levels of trade integration indicate that shared currency could facilitate transactions and reduce costs. Lastly, the ability to manage asymmetric shocks, such as differing economic conditions that affect one economy more than the other, is crucial; economies should have mechanisms in place to address potential disparities caused by a shared currency.