The judgement is made on the basis of the existing literature and available data for several criteria as a part of the oca theory. Endogeneity and specialization theories of optimal currency. Consider a number of countries, and call them a region. Pdf this article aims at providing an eclectic analysis of the theory of optimum currency areas ocas. Monetary union emu and the optimum currency area oca theory. This article aims at providing an eclectic analysis of the theory of optimum currency areas ocas. At this point youre probably wondering, why are currency pairs like the eurusd and usdchf correlated in the first place. Quite curious for a theory about monetary integration.
Thus, europe remains further than the currency unions of north america from the ideal of an optimum currency area. Thus, a region or nation experiencing economic depression will be unable to use the interest rate lever to boost the economy. This paper aims at providing an eclectic analysis of the theory of optimum currency areas oca. Optimum currency area theory oca states that specific areas which are not bounded by national borders would benefit from a common currency.
The optimum currency area theory and the emu springerlink. Martina furrutter 022012 which exchange rates are fixed o2, he was the first to question the appropriate domain of a currency area, however. Similarly a country with high inflation will be unable to independently raise interest rates to contain inflation. Daron acemoglu, jonathan parker, and michael woodford, editors. Although analyzed in terms of criteria for defining an optimum currency area, we could appreciate that eu fulfils certain criteria established within the theory of the optimum currency area. The case for separate currency areas clearly holds good only if the impact of a shock varies between areas. Pdf the optimum currency area oca theory tries to answer an almost prohibitively difficult question. An optimal currency area oca is a geographical region where it is thought a single currency would help to maximise welfare and enhance macroeconomic performance. An optimum currency area oca is a theoretical notion. Therefore, we argue that the oca theory is a framework for discussion about monetary integration. International trade and investment, international finance and macroeconomics an optimum currency area is an economic unit composed of regions affected symmetrically by disturbances and between which labor and other factors of production flow. A modern reconsideration of the theory of optimal currency.
The theory of optimum currency areas oca is a macroeconomic instrument which defines. Instead, at the height of the financial crisis in 2008 that had started in the us, capital flows streamed into us treasury bonds as a safe haven. The endogenity of the optimum currency area criteria pdf. The author focuses on the main classical contributions, then considers modern treatment of oca theory. European economic and monetary integration, and the optimum. A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries. Various advancements in economic theory and econometrics have made it possible to progress from the early oca theory to a new oca theory. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. Optimum currency area theory, nominal and real convergence. Reconsideration of the theory of optimal currency area. A variety of measures suggests that labor mobility and the speed of labor market adjustment remain lower in europe than in the united states. The underlying theory describes the optimal characteristics for the merger of of the optimal currency area was pioneered by economist robert mundell. The economic and monetary union considered, from a certain point of view, the most.
An optimum currency area oca is defined here as the optimal geographic domain of a single currency, or of several currencies, whose exchange rates are. Theory of optimum currency areas and the european monetary union ps internationale wirtschaftsbeziehungen ss 2005 verena kuhn, agnes seeber theory of oca and the emu part 1. It sets up a description for what distinct qualities it would take for an area to become an oca and either merge currencies or have a new currency. A theory of optimum currency areas san francisco state. Download 7page essay on economics optimal currency area 2020. Mundells analysis was shortly afterwards elaborated on by mckinnon 1963, and by kenen 1969, since when optimum currency area oca theory was developed by a growing number of studies, both theoretical and empirical. In its simplest form, as mundell describes it, an optimal currency area is a region, or area, where the benefits of sharing a common currency outweigh the costs. In this text, i take a step back from the current debate, and reconsider the very foundations of the theory of optimal currency areas henceforth oca drawing on recent contributions to stabilization theory in closed and open economies see for. Well much like our temperature and ice cream and temperature and clothing examples from before, currency correlations come down to basic fundamentals. Countries within it are highly integrated with each other i. Oca is a geographic area that is best suited to share the same currency because it would optimize the regions economic efficiency. The underlying theory describes the optimal characteristics for the merger of. Robert mundell and the theoretical foundation for the.
According to mundell, optimum currency area is a region which leads automatically to a complete elimination of unemployment and the bop disequilibrium. The theory of optimum currency areas pioneered by mundell was further. Mundell global risk annual lecture as part of the global risk series with his careful analysis of optimum currency area oca theory and its application in the eurozone, professor vitor constancio, former vice president of the european central bank 20102018, pays. Although the share of intraeu trade has increased since the introduction of the euro, dissimilarities in economic structure combined with high degrees of industrial specialisation have increased the emu. The main idea was to define until what extent some countries ez countries, for instance should give up from their independent monetary policy, in order to gain from micro and macroeconomics. Jan 06, 2012 for all those interested in optimum currency areas my new infoposter economics is now available. Does the scope of optimal currency area theory suggest the need for greater multilevel fiscal governance in the eurozone.
Grubel australian national university and university of pennsylvania the purpose of this note is to synthesize and extend the existing theory of optimum currency areas. For a currency area to be optimal strictly speaking, it must nearly always be necessary for various regions of a single state to join with different monetary areas, each having its own currency. This study aims to assess turkeys position relative to european countries with respect to the optimum currency areas oca criteria, taking germany as the center country and employing mahalanobis distance as a similarity measure. In both cases, the countries have a joint currency and a joint central bank. The geographic area in which a single currency would create the greatest economic benefit. Paul krugmans argument that the eurozone is not an. Optimum currency area, a currency area in which the benefits of using a common currency outweigh the costs of individual economies giving up their own currencies. Er kam daher zu dem ergebnis, dass ein wahrungsraum dann optimal sei, wenn eine ausreichende faktormobilitat, d. Pros and cons of the eurozone thorsten mannherz term paper economics finance publish your bachelors or masters thesis, dissertation, term paper or essay. Paul krugmans argument that the eurozone is not an optimum currency area could be just as easily applied to the us in a recent conference, the distinguished economist paul krugman repeated the oftheard critique that the eurozone is not an optimal currency area.
Mundell, the euro, and optimum currency areas by ronald mckinnon1 robert mundell was recently awarded the 1999 nobel prize in economics for pathbreaking theoretical contributions published in the 1960s on the ways monetary and fiscal policies work in open economies. On the other hand, a common currency imposes costs, in the. Revenge of the optimum currency area the new york times. More than ten years after the creation of the common currency area, the eurozone crisis. The difficulty of the question leads to a low operational precision of oca theory. This pdf is a selection from a published volume from the.
Theory of optimum currency areas and the european monetary union. The eastern caribbean currency area ecca and the cfa zone in africa are intermediate between the two types of unions. More specifically, the paper attempts first to clarify the nature of the institutional changes required for currency area. Although the basic tenets of the theory were anticipated during the late1940s and the 1950s, the theory was developed and maturated in three highly influential papers of mundell 1961, mckinnon 1963, and kenen 1969. The article deal with optimum currency area oca theory and examines which of the new eu member states are suitable candidates for the euro extended by eu10 countries membership. The findings of these discussions, the so called theory of optimal currency areas, played. Does the scope of optimal currency area theory suggest the. The single currency, or the pegged currencies, can fluctuate only in.
For all those interested in optimum currency areas my new infoposter economics is now available. Mundell it is patently obvious that periodic balanceofpayments crises will remain an integral feature of the international economic system as long as fixed exchange rates and rigid wage and price levels prevent the international price system from fulfilling a natural role in the adjustment process. An optimal currency area oca is a geographical region where it is thought a single currency would help to maximise welfare and enhance macroeconomic performance an oca works best when 1. The optimum currency area theory and the euro robert a. In economics, an optimum currency area oca, also known as an optimal currency region ocr, is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. Theoretical background introduction costs and benefits the old oca theory the new oca theory part 2. Soon after the establishment of the eurozone it became obvious that the structural differences between member states would not abate, as expected, but rather gradually widen. On the one hand, optimum currency areas would, in any case, almost never fit into the confines of a state or a collection of existing states.
Cecile couharde issiaka coulibaly david guerreiro valerie mignon nontechnical summary this paper aims at explaining why the cfa countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area. Optimal currency area theory oca is a body of research that has been highly influential, since its inception in 1961, on the discourse and design of economic and monetary union. Following europes decision to move towards emu the theory of optimum currency areas oca, which had remained dormant since the 1970s, was resurrected as a means of analysing the emu project. I also thank the participants in the conferences monetary policy implications of heterogeneity in a currency area, organized by the european central bank in 2004, 40 anni di attivita dellente einaudi 19652005 organized by ente. The aim of this paper is to assess whether the euro zone is an optimal currency area. The optimum currency area oca theory tries to answer an almost prohibitively difficult question. In particular, the convergence criteria, stability and growth pact and.
But in comparison with usa or canada, the eu has less premises to effectively become such an area. The second part considers empirical literature on the types of geographical areas that might constitute optimum currency areas, particularly. Moreover, islamic countries, which form a large part of the geography, do not believe in interest rates. This essay follows the synergies and complementarities between european economic and monetary union emu and the optimum currency area oca theory. The optimum currency area criteria in the light of theory and in practice of the european union member countries piotr misztal technical university in radom economic department the chair of international economic relations and regional integration chrobrego street 29, 26600 radom, poland email. Although the share of intraeu trade has increased since the introduction of the euro, dissimilarities in economic structure combined with high degrees of industrial. The optimum currency area theory and the emu intereconomics. Theory of optimum currency area oca is the theoretical basis for analyzing the advantages of membership in a monetary union.
Although part of the problem can be attributed to the enlargement process, it also relates to asymmetric effects of the common currency and to diverging economic policies. An assessment of theoretical and applied empirical literature is discussed. Putting the gg and ll schedules together the intersection of gg and ll determines a critical level of economic integration between a fixed exchange rate area and a country shows how a country should decide whether to fix its currency s exchange rate against the euro the theory of optimum. European economic and monetary integration, and the. A theory of optimum currency areas1 san francisco state. To represent a respected economic paradigm, or to be supported by people who represent one, is important for making it onto the political agenda. A modern reconsideration of the theory of optimal currency areas. This pdf is a selection from a published volume from the national bureau of economic research volume title. This encompasses a discussion of traditional optimal currency area theory as initiated by mundell 1961 and mckinnon 1963 as well as further. In other words, geographic regions may be better off using the same currency instead of each country within that geographic region using its own currency.
In a currency area, either there is a common currency or the currencies of a group of countries are linked through a permanently fixed exchange rate. An optimal currency area oca is a geographic area that is best suited to share the same currency because it would optimize the regions economic efficiency. Optimal currency area theory ignores financial markets completely, along with monetary policy and central banks. The eurozone crisis has revealed certain shortcomings of the emu, such as its vulnerability to asymmetric shocks and its inability to act as predicted by the theory of optimum currency areas. In the second half of the 1980s interest in monetary integration was rekindled and the members of the european union faced an emu question, concerning the timing and modalities of implementing a currency union once the political decisions to create one has been taken. Abstract optimal currency area theory oca is a body of research that has been highly influential, since its inception in 1961, on the discourse and design of economic and monetary union.
The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. It lacked the capacities to adjust to economic shocks conferred by high rates of labor mobility and social insurance schemes capable of automatically redistributing revenues to regions suffering from recession. Nber macroeconomics annual 2012, volume 27 volume authoreditor. Although the basic tenets of the theory were anticipated during the late1940s and the 1950s, the. This theory has been described as wondrous doctrine which can often be the background for quite contradictory conclusions d edek, 2002. If these countries experience similar macroeconomic shocks, and if theres labor mobility between.
Jun 24, 2012 so optimum currency area theory was right to assert that creating a single currency would bring significant costs, which in turn meant that europes lack of mitigating factors in the form of high labor mobility andor fiscal integration became a very significant issue. Supply is assumed to be highly elastic, once demand is. Defenders of the common currency and critics as well refer to this theory. Chapter 20 optimum currency areas and the european.
The theory of optimum currency areas oca explores the criteria as well as first time that someone used the phrase optimum currency area was mundell. An optimum currency area oca is a geographical region in which maximise economic efficiency is attained by the entire region sharing a single currency a monetary union, or by several currencies pegging to each other via a fixed exchange rate. For him the optimum currency area is the region and not the nation, and he strikes the vital importance of a. While traditionally each country has maintained its own separate, national.
To illustrate this difference consider a simple model of two entities regions. An optimal currency area theory was for the first time developed by robert mundell, in a theory of optimum currency areas september, 1961. Optimum currency area theory is about weighing the balance between those advantages and those potential costs. Abstract this paper surveys the optimum currency area oca literature. The balance of judgements has shifted in favour of monetary union. An optimum currency area oca is defined here as the optimal geographic domain of a single currency, or of several currencies, whose exchange rates are irrevocably pegged and might be unified. Martina furrutter 022012 in 1961 robert mundell published his famous article a theory of optimum currency areas1 presenting his idea of an optimal monetary area in which there should be perfect internal mobility of factors and external immobility of factors. The euro raises issues addressed by a theory known as the optimum currency area oca theory. A theory of optimum currency areas it is patently obvious that periodic balanceofpayments crises will remain an integral feature of the international economic system as long as fixed ex change rates and rigid wage and price levels prevent the terms of trade from fulfilling a natural role in the adjustment process.
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