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A THEORY OF OPTIMUM CURRENCY AREAS MUNDELL PDF

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 of the optimal currency area was pioneered by economist Robert Mundell. 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. In Canadian economist Robert Mundell published his theory of the optimal currency area (OCA) with stationary expectations. He outlined.

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Login or Register Information of interest. European Journal of Political Economy. Beyond the primarily economic and technical considerations, Mundell’s concern was also to place the creation of the euro in a broader perspective, that of the international monetary system, whose operations he analyzed, perhaps better than anyone else, in his work. These economic arguments are supported by social arguments as well.

In the previous example, arsas there were a central bank in the West, it could lower its interest rates to combat unemployment, while the central bank in the East could raise its interest rates to combat inflation. Journal of European Public Policy. OCA theory has been arezs frequently applied to discussions of the euro and the European Union.

Optimum currency area – Wikipedia

However, if the currency union was established anyway, its member-states would trade so optmum more that, in the end, the OCA criteria would be met. An optimal currency area is often larger than a country.

In contrast with the previous model, asymmetric shocks are not considered to undermine the common currency because of the existence of the common currency. Currency unions International economics Monetary policy. How can one be the author of a theory cutrency criticizes the monetary union and one of the principal spiritual fathers optimmum the euro at the same time? Thus, creating the Eurozone will not only boost trade volume, but also increases the symmetry of shocks.

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If workers agree to a drop in their real wages through a rise in prices caused by devaluation, it will be possible to maintain employment. In theory, an optimal currency area could also be smaller than a country. The relationship between these two new currencies, which would replace the Canadian dollar and the United States dollar, would be governed by a floating exchange rate. However, it has lower labour mobility than the United States, possibly due to language and cultural differences.

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Optimum currency area

This Canadian economist has strong ties in Europe: Mundell was an ardent supporter of the euro, of which he is considered the godfather. Monetarists in the normal sense of the term are therefore “economists” in the sense of the debate on the monetary union!

Europe exemplifies a situation unfavourable to a common currency. By looking at the correlation of a region’s GDP growth rate with that of the entire zone, the Eurozone countries show slightly greater correlations compared to the U. Here asymmetric shocks are considered to undermine the real economy, so if they are too important and cannot be controlled, a regime with floating exchange rates is considered better, because the global monetary policy interest rates will not be fine tuned for the particular situation of each constituent region.

Hence, a region of Germany could join with a region of France to create their own currency and abandon the mark and the franc. The possibility of adopting a more moderate inflation rate if the rest of the world is unstable and the country in question is stable; the necessity of adopting a higher inflation rate if the country is incapable of managing its fiscal and monetary policy in a stable manner.

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For Mundell, money illusion of this type cannot be expected to last for very long. 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.

Robert Mundell and the Theoretical Foundation for the European Monetary Union

Budapest Open Access Initiative. The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. What is important is to give up credibly the idea of having an autonomous national monetary policy and to establish the institutions necessary for the management of a common monetary policy.

It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe.

To understand the notion of asymmetrical shock and the role of the exchange rate, let us assume with Mundell that Western Canada produces forestry products, and the East, automobiles. Most economists cite preferentially the first stationary expectations model, and conclude against the optimality of the euro.

His theory of optimum currency areas, highlighted in the Nobel Committee’s citation as one of his most significant scientific contributions, has served since the s as an analytical framework for numerous debates on the validity of the creation of a European currency.