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.

Author: Gushura Bralrajas
Country: Burkina Faso
Language: English (Spanish)
Genre: Travel
Published (Last): 25 September 2006
Pages: 23
PDF File Size: 15.89 Mb
ePub File Size: 14.84 Mb
ISBN: 669-7-45507-762-8
Downloads: 94891
Price: Free* [*Free Regsitration Required]
Uploader: Kazigar

Supposing that the currency is managed properly, the larger the area, the better.

Optimum currency area

The benefits of adopting a common currency include a reduction of the various transaction costs generated by the existence of various currencies and a gain in the liquidity of the ootimum, attributable mainly to the expansion of its area of transactions, from which all financial markets would also benefit.

Center for Full Employment and Price Stability. OCA theory has been most frequently applied to discussions of the euro and the European Union. The European Monetary Union is an eminently political instrument that can be understood only in light of historical developments in the old continent. Budapest Open Access Initiative.

Here Mundell tries to model how exchange rate theoey will interfere with the economy; this model is less often cited.

Views & Commentaries

For work that led to the euro, not for his supply-side theory”. 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.

Journal of Economic Literature.

Second, within a single country, capital mobility mundfll take the place of labor mobility in facilitating adjustment. 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. The theory is used often to argue whether or not a certain region is ready to tyeory a currency unionone of the final stages in economic integration.


If workers agree to a drop in their real wages through a rise in prices caused by ardas, it will be possible to maintain employment. Read, highlight, and take notes, across web, tablet, and phone. In theory, an optimal currency area could also be smaller than a country.

The four often cited criteria for a successful currency union are: The question is innovative, for Mundell envisaged a new global monetary map from the regional rather than the national viewpoint. Hence, a region of Germany could join with a region of France to create their own currency and abandon the mark and the franc. 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.

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.

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. When a state in the U. A theory of optimum currency areas. Our Nobel prize winner was therefore being neither inconsistent nor schizophrenic when he supported the idea of a monetary union in Europe in the s. The European crisis, however, may be pushing the EU towards more federal powers in fiscal policy.

Robert Mundell and the Theoretical Foundation for the European Monetary Union

Common terms and phrases A. Wikipedia articles needing page number citations from July All articles with areass statements Articles with unsourced statements optimuum March 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. 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.

The European Union and the financial crisis”. The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. Aeras a supporter of the euro, Mundell can respond in several ways to those for whom his theory of optimum currency areas condemns the European Monetary Union to failure.


Optimum currency area – Wikipedia

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. Views and Commentaries for He also found that the Plains would not fit into an optimal currency area.

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. If instead, the European currencies were bound together disturbances in the country would be cushioned, with the shock weakened by capital movements. However, caution should be employed when analysing the self-fulfilling argument.

Some sectors in the OCA might end up becoming concentrated in a few locations. 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 stabilization 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.

These considerations dominated scientific debate on the European Monetary Union, with most analysts concluding that Europe, whether made up of six, eleven, or fifteen countries, did not optimuj an optimum currency area, as it met the above-mentioned criteria only partially. It is symptomatic of an erosion of the hegemony of the United States and represents a counterbalance to the dollar, even if the latter remains the dominant currency.