Nontechnical summary this paper brings together several strands of the literature on the endogenous effects of monetary integration. They have since been joined by six more eu members. National currencies and flexible exchange rates the existence of more than one currency area in the world implies by defi nition variable exchange rates. However, if the same economies combine together and form a. Capital market imperfections and the theory of optimum currency areas.
However, empirical studies have been unable to draw clearcut conclusions on the optimality of the cfa zone. Although the share of intraeu trade has increased since the introduction of the euro, dissimilarities in economic structure combined with high degrees of industrial. Introduction like it or not, the theory of optimum currency areas remains the workhorse for analyses of european monetary unification. Optimality depends on degree of economic integration. The theory tries to answer an exchange rate based question. It is a region where it is best o ptimal to have a single currency. This paper aims at providing an eclectic analysis of the theory of optimum currency areas oca. Scott adjustment under fixed argument for flexible assume bank can expand based on national capital mobility causes unemployment central banks common currency currency area comprising degree of factor degree of money east econ economists entities exchange rates based experimented with flexible factor immobility factors are mobile fixed. Optimum currency area, economic and monetary integration and emu 4 ecb working paper series no. 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. Nber macroeconomics annual 2012, volume 27 volume authoreditor. There has been a flood of research on the asymmetry of shocks in europe.
The endogenity of the optimum currency area criteria pdf. The fault lies not with the type of currency area, but with the domain of the currency area. 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 the underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. One of these objectives is the formation of a monetary union in the future. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. This pdf is a selection from a published volume from the national bureau of economic research volume title. An optimum currency area oca is a theoretical notion.
Monetary problems of the international economy chicago u. One possibility is the usage of the optimum currency area oca theory that focuses on assessment of benefits and costs of monetary integration. Low opportunity cost of relinquishing monetary sovereignty. The eastern caribbean currency area ecca and the cfa zone in africa are intermediate between the two types of unions. Optimum currency area, economic shock, convergence, hypothesis of endogeneities jel codes. The optimum currency area approach to european monetary. Gambia should establish a single currency mon etary union to later merge with the west afri can francophone. 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. Usefulness of a currency grows with the size of the area costs due to diversity may also grow asymmetric shocks, one. The aus strategy relies on the prior creation of monetary unions in five existing regional economic communities see map 1. That said, emu seems clearly to be moving along the path to becoming an optimum currency area. Optimum currency areas and key currencies springerlink. 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 freely. To start with, mongelli 2002 defines the currency area as an optimal geographic domain of a single.
Optimum currency area, economic and monetary integration and emu. An optimumcurrencyarea index for european countries tamim bayoumi and barry eichengreen1 august 1996. Fixed versus floating exchange rates we have studied the e. A theory of optimum currency areas1 san francisco state. Optimum currency areas and the european experience o n january 1, 1999, 11 member countries of the european union eu adopted a common currency, the euro. Daron acemoglu, jonathan parker, and michael woodford, editors. In both cases, the countries have a joint currency and a joint central bank. Optimum currency area theory is about weighing the balance between those advantages and those potential costs. The underlying theory describes the optimal characteristics for the merger of. European monetary integration led to a renaissance of the theory of optimum currency areas oca culminating in the 1999 award of the nobel prize to robert mundell. 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. This paper surveys the optimum currency area oca literature. Lecturenoteonexchangerateregimes, optimum currency.
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. The last indicates that an agent who switches along with all the others receives the full network benefit dn as well as the nonnetwork benefit of the new currency, but he also has to pay the switching cost. The optimum currency area approach to european monetary integration. Endogeneities of optimum currency areas european central bank. Revenge of the optimum currency area paul krugman the creation of the euro was supposed to be another triumphant step in the european project, in which economic integration has been used to foster political integration and peace. Is optimum currency area theory federal reserve bank of. The theory for the optimal currency area the theory of the optimum currency area appeared in the early 1960s as a result of the seminal work of mundell 1961, along the subsequent work of mckinnon 1963 and kenen 1969. The term optimal refers to the macroeconomic objective to maintain an internal and external equilibrium. The borders of an oca are defined by the sovereign countries choosing to. Optimum currency area the economic theory explains that currencies should operate in an area that is sufficiently homogeneous to provide a stable basis for that currency. For him the optimum currency area is the region and not the nation, and he strikes the vital importance of a. This issue has been mainly studied by referring to the optimum currency area oca criteria. In an effort to combine the various criteria for a monetary union, bayoumi and eichengreen 1999 developed an oca index that predicts the. Athanasoglou, revisiting the merger and acquisition.
This approach can help us to identify and possibly to estimate costs and benefits of adopting a common currency. Empirical analysis of optimum currency area in east asia. Pdf this article aims at providing an eclectic analysis of the theory of optimum currency. The theory of optimum currency area oca has been a study of monetary integration since the 1960s. However, in a littleknown article published in 1973, uncommon arguments for common currencies, mundell argued that asset holding for international risk sharing is better served by a common currency spanning a wide areawithin which countries or regions could be, and perhaps best be, quite different. The international monetary system is characterised by a multiplicity of different currencies. The optimum currency area theory and the emu springerlink. For the most part, these are based on sovereign nation states a situation which john stuart mill famously described as barbarism. This is the widest objective for sadc and the path towards achieving this is the establishment of a trade protocol that aims to form a free trade area in the.
The geographic area in which a single currency would create the greatest economic benefit. Otherwise, there will be pressures for subareas to break away or requirements for major transfers of money from a central authority to subareas in order to iron out regional. European economic and monetary integration, and the. Introduction it is possible to assess convergence of eu economies in several ways. 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 oca theory serves as an approach for thinking about monetary integration and provides an explanation for the recent monetary integration processes in europe. Although the basic tenets of the theory were anticipated during the late1940s and the 1950s, the.
Countries within it are highly integrated with each other i. This can be obviously linked to the limitations of the oca. Revenge of the optimum currency area the new york times. While traditionally each country has maintained its own separate, national. 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. A modern currency union between large rich countries like emu has no historical precedent, and too little time has passed since the introduction of the euro for the trade and bcs effects to be clearly estimated. Europes bold experiment in economic and monetary union emu, which many had viewed as a visionary fantasy only a few. Theory of optimum currency areas the theory of optimum currency areas argues that the optimal area for a system of fixed exchange rates, or a common currency, is one that is highly economically integrated.
The symmetrical nature of disturbances and the high degree of factor mobility make it optimal to forsake nominal exchange rate changes as an instrument of adjustment and to. Supply is assumed to be highly elastic, once demand is. A theory of optimum currency areas robert alexander. Consider two economies with sticky prices and business cycles. Chapter 20 optimum currency areas and the european. The traditional optimal currency area approach draws its insights largely from an economic environment in which there exists shortrun price stickiness and employment adjustment to shocks, accompanied by a longerrun inflationemployment tradeoff. This paper discusses the literature which associates the economic characteristics of emu with arguments of the optimum currency area oca. Since theory has low operational precision and oca criteria are. These regional unions would be an intermediate stage, leading ultimately to their merger, creating a single african central bank and currency. 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. Currency areas and the european monetary union ps internationale wirtschaftsbeziehungen ss 2005. Lecturenoteonexchangerateregimes, optimum currency areas, and the euro barry w.
Empirical analysis of optimum currency area in east asia eiji ogawaa and kentaro kawasakib february 19, 2008 a graduate school of commerce and management, hitotsubashi university. Trade in goods and services factor mobility a fixed exchange rate area will best serve the economic interests of each of its members if the degree. 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. A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries. The theory of optimumcurrencyareas was conceived and developed in three highly influential. Large benefits from one instead of two currencies large trade and. Sadc has a number of objectives which it aims to achieve. E42, f33, g01 introduction an optimum currency area oca is an optimal geographic area where the main means of payment is a common currency.
Currency competition, network externalities and switching. This pdf is a selection from a published volume from the. Theory of optimum currency areas, which provided the analytical framework. Optimum currency areas, exchange rate regimes, optimality criteria. Since the seminal contribution of mundell 1961, the literature on optimum. For all those interested in optimum currency areas my new infoposter economics is now available. An optimum currency area oca can be defined as the optimal geographical area for a single currency, or for several currencies, whose exchange rates are irrevocably pegged.