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.
|Published (Last):||1 April 2007|
|PDF File Size:||13.49 Mb|
|ePub File Size:||7.97 Mb|
|Price:||Free* [*Free Regsitration Required]|
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. In the circumstances, the main argument for exchange flexibility is the possibility or the necessity of adopting an exchange rate different from that of the rest of the world. For example, if goods markets are better connected, shocks will be more rapidly transmitted within the OCA and will be felt more symmetrically.
In what circumstances could it be of benefit for Western Canada and the Western United States to join together to create a Western currency, or for the Eastern parts of the two countries to create a currency peculiar to the East of the continent? Wikipedia articles needing page number citations from July All articles with unsourced statements Articles with unsourced statements from March Firstly, the self-fulfilling effect’s impact may not be significant.
In theory, an optimal currency area could also be smaller than a country. So despite a less fine tuned monetary policy the real economy should do better. Some economists have argued that the United States, for example, has some regions that do not fit into an optimal currency area with the rest of the country. And the monetary union itself is a factor of integration which will at the same time increase the mobility of the factors of production and reduce the probability of asymmetrical shocks.
Views Read Edit View history.
From Wikipedia, the free encyclopedia. Some sectors in the OCA might end up becoming concentrated in a few locations.
Robert Mundell and the Theoretical Foundation for the European Monetary Union
Crrency looking at the correlation of a region’s GDP growth rate with that of o entire zone, the Eurozone countries show slightly greater correlations compared to the U.
Paradoxically, his theory has been used by numerous economists to oppose the European Monetary Union and question its chances of success. Hence, a region of Germany could join with a region of France to create their own currency and abandon the mark and the franc. Currency unions International economics Monetary policy.
The European crisis, however, may be pushing the EU towards more federal powers in fiscal policy. In economicsan optimum currency area OCAalso known as an optimal currency region OCRis a geographical region in which it would maximize economic efficiency to have the entire region share a single currency.
A harvest failurestrikesor war, in one of the countries causes a loss of real income, but the use of a common currency or foreign exchange reserves allows the country to run down its currency holdings and cushion the impact of the loss, drawing on the resources of the other country until the cost of the adjustment has been efficiently spread over the future.
The second counter-argument is that further goods market integration might also lead to areax specialization in optimmum. However, if the currency union was established anyway, its member-states would trade so much more that, in the end, the OCA criteria would be met. Common terms and phrases A. For Mundell, money illusion of this type cannot be expected to last for very long. The more open the economy, the more sensitive it will be to shocks and the less stable and liquid its currency will be.
However, another school of thought argues that some of the OCA criteria are not given and fixed, but rather they are economic outcomes i. To respond to this question, Mundell develops a cost-benefit analysis of the monetary union. Once individual firms can easily serve the whole OCA market, and not just their national market, they will exploit economies of scale and concentrate production.
These economic arguments are ot by social arguments as well. For Mundell, the existence of a stable monetary anchor is essential.
In our Canadian example, the depreciation of the Western currency leads to a rise in import prices and in price levels generally, thus offsetting the effect of the decline in demand for forestry products produced in the region.
Retrieved 24 July That also explains why he saw an increasing number of countries gravitating toward the two major currencies of the 21st century, the dollar and the euro. The question is innovative, for Mundell envisaged a new global monetary map from the regional rather than the national viewpoint. He also found that the Plains would not fit into an optimal currency area. This analysis highlights a number of criteria that a monetary union must meet.
This dilemma can be resolved through mobility of the factors of production, and the labor factor in particular. The theory is used often to argue whether or not a certain region is ready to become a currency opyimumone of the final stages in economic cirrency.
What ardas 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. 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 tgeory exchange rates flexible ex flexible exchange rates flexible exchange system gions gold standard inflationary pressure internal factor mobility International Adjustment International Disequilibrium interregional J.
Views & Commentaries
Meade labor mobility mand means of payment Monetary Dynamics money illusion multiregional countries national currencies national money supplies number of currencies optimum currency area ployment pressure in region real income regional currency areas rency area separate currency single currency area stabilization argument mundwll policy surplus countries system of flexible terms of trade Tibor Scitovsky tion tional currencies unemployment in deficit unit of account United States dollar variable exchange rates West Western dollar Western Europe.
That explains his penchant for monetary systems in which, without going so far as to return to the gold standard, currencies continue to be pegged in one way or another to a precious metal. At the top of the list is an absence of frequent, large-scale asymmetrical shocks and mobility in the factors of production.
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 curgency the validity of the creation of a European currency.
Centre for Economic Policy Research. Budapest Open Access Initiative.
Center for Full Employment and Price Stability. The price of automobiles will tend to increase, leading to a general rise in prices in the East; conversely, prices will tend to decline in the West, as a result of a fall in the price of forestry products.
Journal of Economic Literature. First, the argument that floating exchange arrangements are superior to fixed exchange arrangements or to a common currency for mitigating the effects of asymmetrical shocks is based, as Mundell’s article explicitly points out, on the existence of money illusion.
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. 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.
This implies that any proposal of a union of existing states could be rejected on grounds of nonoptimality, if the term optimality is to be given its strict meaning. The terms of trade between the West and the East deteriorate. This spreads the shocks in the area because all regions share claims on each other in the same currency and can use them for dampening the shock, while in a flexible exchange rate regime, the cost will be concentrated on the individual regions, since the devaluation will reduce its buying power.
Accordingly, for a small country or for a region where the share of imports and exports in GDP is large, the effects of a devaluation on price levels will be immediate, and the money illusion will quickly disappear.