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. The cfa franc zones and the theory of optimum currency area. The optimum currency area theory and the emu springerlink. Lecturenoteonexchangerateregimes, optimum currency. Optimum currency area an epistemological view full paper. The results show a systematic pattern for each cfa country which is, in addition, similar to the cfa zone as a whole. 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 currencys exchange rate against the euro the theory of optimum. The theory of optimumcurrencyareas was conceived and developed in three highly influential. To represent a respected economic paradigm, or to be supported by people who represent one, is important for making it onto the political agenda. The optimum currency area approach to european monetary.
Several other important contributions followed suit highlighting a. This paper aims at providing an eclectic analysis of the theory of optimum currency areas oca. The renaissance of the theory culminated in the 1999 award of the nobel prize to. 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. Certain parts of the world are undergoing processes of economic. Mundell warned the reader not to regard the exercise as purely academic. 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. Lecturenoteonexchangerateregimes, optimum currency areas, and. 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. Theoretical background introduction costs and benefits the old oca theory. Capital market imperfections and the theory of optimum.
Concept of optimum currency areas, european monetary. The geographic area in which a single currency would create the greatest economic benefit. June 5, 2011 abstract this paper provides a theory of money, whose value depends on the functioning of the intermediary sector, and a uni ed framework for analyzing the interaction between price and nancial stability. The theory is used often to argue whether or not a. Reconsideration of the theory of optimal currency area. A modern reconsideration of the theory of optimal currency. Pdf the theory of optimum currency areas researchgate. Concept of optimum currency areas, european monetary system. Abstract this paper surveys the optimum currency area oca literature. The first is the pioneering phase from the early 1960s to the early 1970s. More specifically, the paper attempts first to clarify the nature of the institutional changes required for currency area formation and second, to spell out the functional relationships between welfare and currency area formation. Theory formulates conditions when this is possible.
But the theory does at least give us some insight into the trade offs. Jan 06, 2012 for all those interested in optimum currency areas my new infoposter economics is now available. The difficulty of the question leads to a low operational precision of oca theory. 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. Capital market imperfections and the theory of optimum currency areas pierrerichard agenor and joshua aizenman nber working paper no. 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. According to the oca theory, a country that considers membership in a currency union has to balance the. The evolving optimum currency area theory almost 50 years have passed since the founding of the optimum currency area oca theory thanks to the seminal contributions of, among others, mundell 1961, mckinnon 1963 and kenen 1969. This paper surveys the optimum currency area oca literature. This pdf is a selection from a published volume from the. I proceed first with a brief historical background of monetary and economic arrangements in africa in the post independence period. Theory of optimum currency areas and the european monetary union. We turn to that shortly and to the euro in particular.
Put differently, the theory of optimum currency area must be seen as a balance between costs and benefits of sharing a common currency. 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. Obviously these benefi ts depend on potential economic interactions. The judgement is made on the basis of the existing literature and available data for several criteria as a part of the oca theory. Concept of optimum currency areas, european monetary system vidyamitra. Supply is assumed to be highly elastic, once demand is. Indeed, the adjustment of real exchange rates, while being lower in column 3 than in columns 1 and 2 except for equatorial guinea, remains significant when changes in nominal exchange rates are taken into account. The optimum currency area oca theory tries to answer an almost prohibitively difficult question. The optimum currency area oca theory tries to answer an almost prohibitively.
The achievement of this phase was to put forward the oca properties, start. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. 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. Nber macroeconomics annual 2012, volume 27 volume authoreditor. In the second half of the 1980s interest in monetary integration was rekindled and the members of the european union faced. For all those interested in optimum currency areas my new infoposter economics is now available. European economic and monetary integration, and the optimum.
But demanding if misapplied five convergence criteria necessary for emu entry remain orthogonal to oca criteria. Usefulness of a currency grows with the size of the area costs due to diversity may also grow. Revenge of the optimum currency area the new york times. Usefulness of a currency grows with the size of the area costs due to diversity may also grow asymmetric shocks, one common policy marginal costs and benefits costs of forming a cu loss of exchange rate as an adjustment tool loss of monetary autonomy.
The theory of optimum currency areas and european monetary. A model if an optimum currency area international monetary fund. In final period of this phase the new theory of optimum currency area began predominating so called the classic theory of optimum currency area. The purpose of this note is to synthesize and extend the existing theory of optimum currency areas. The aim of this paper is to assess whether the euro zone is an optimal currency area. 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. It is patently obvious that periodic balance ofpayments crises will remain an integral feature of the international economic. 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. An optimum currency area oca is a theoretical notion. This contributed to creation the new theory of optimum currency area and arising of debate on sizes of currency area and deadline of the currency area creation tavlas 1993. Optimum currency area theory, central banking, transition, european union. This can be obviously linked to the limitations of the oca. Daron acemoglu, jonathan parker, and michael woodford, editors.
The optimum currency area theory tries to explain whether it makes economic sense for a group of countries to abandon their national currencies. Oca determine the economic and political mechanisms which help to reestablish equilibrium in the economy. May 07, 2015 however as was in 1950, an optimum currency area as defined above is still a very ambiguous region even with todays developments of the theory referencing the practicality of european monetary union emu. It is patently obvious that periodic balanceofpayments crises will remain an integral feature of the international economic. Jan 23, 2018 concept of optimum currency areas, european monetary system vidyamitra. Jun 24, 2012 unfortunately, it turned out that optimum currency area theory was essentially right, erring only in understating the problems with a shared currency. Optimum currency area theory is about weighing the balance between those advantages and those potential costs. But in comparison with usa or canada, the eu has less premises to effectively become such an area. The case for separate currency areas clearly holds good only if the impact of a shock varies between areas. F12,f15,f2,f36 abstract this paper studies how capital market imperfections affect the welfare effects of forming a currency union. A particular country will have the incentive to share a common.
Therefore, we argue that the oca theory is a framework for discussion about monetary integration. Ss 2005 verena kuhn, agnes seeber theory of oca and the emu part 1. A theory of optimum currency areas1 san francisco state. Chapter 20 optimum currency areas and the european. Resultantly, a number of small areas that trade extensively with each other would peg with each other mckinnon, 1996, 246. European economic and monetary integration, and the. I n a pioneering article published in 1961, professor mundell endeavoured to lay the foundations of a theory of optimum currency areas. Rose 6 february 2008 since world war ii, economies have exited currency unions at an average rate of one per year. Pdf on jan 1, 2014, istvan benczes and others published the theory of optimum currency areas find, read and cite all the research you need on. This dissertation analyses the euro area in light of the theory of optimum currency areas oca, aiming to draw some conclusions about whether the euro area is currently closer or farther from the concept of an oca than it was before the recent shocks it has endured, namely, the 2008 global financial crisis and the 2010 sovereign debt crisis. A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its.
A theory of optimum currency areas american economic. The theory of optimum currency areas pioneered by mundell was further complemented by mckinnon and again by kenen. However as was in 1950, an optimum currency area as defined above is still a very ambiguous region even with todays developments of the theory referencing the practicality of european monetary union emu. However, empirical studies have been unable to draw clearcut conclusions on the optimality of the cfa zone. 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.
The theory is used often to argue whether or not a certain region is ready to become a currency union, one of the final stages in economic integration. The optimum currency area theory and the emu intereconomics. This pdf is a selection from a published volume from the national bureau of economic research volume title. The traditional optimum currency theory arguments and associated criteria for choosing fixed versus flexible exchange rates on independent currencies which. Coordination problem often the choice of exchange rate is made as if this is an independent choice. Unfortunately, it turned out that optimum currency area theory was essentially right, erring only in understating the problems with a shared currency. Pdf this article aims at providing an eclectic analysis of the theory of optimum currency areas ocas. 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 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. The more open an economy is, the less costly will be the decision to relinquish its domestic currency. In final period of this phase the new theory of optimum currency area began predominating so called the classic. Taking into consideration the experiences from the current crisis in the euro zone, the question arises if the theory of an optimum currency area correctly explains the conditions for a functioning monetary union, and if the present euro zone crisis can be explained through it. Although the basic tenets of the theory were anticipated during the late1940s and the 1950s, the. Hancke and rhodes 2016, but without rigorous theory or empirics promising early start by duval and elmeskov 2006, but little followup finding.
This paper surveys the literature on the optimum currency area oca theory. This chapter discusses the theory of optimum currency area. While traditionally each country has maintained its own separate, national. We also need to say that in practice very little of optimum currency area theory is concerned with the benefi ts of a single currency area. Martina furrutter 022012 which exchange rates are fixed o2, he was the first to question the appropriate domain of a currency area, however. The founders of the oca theory the subject of debate in this paper considers the theoretical feature of the currency areas analysis offered by the optimum currency area theory. The economic and monetary union considered, from a certain point of view, the most ambitious and risky. The global financial and economic crisis has highlighted the risks faced by the single currency area, if the member states react to events differently. Several other important contributions followed suit. For him the optimum currency area is the region and not the nation, and he strikes the vital importance of a. Mundells 1961 seminal paper a theory of optimum currency areas. The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries.
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