Theory of optimal currency areas Is the EU an optimal currency area? No 555, CEPR Discussion Papers from C.E.P.R. Europe has been trying to form an optimum currency area (OCA) since the introduction of the euro. Efforts are needed on many fronts in order optimality to be achieved for every OCA criterion and in that sense the Euro zone to become an optimal currency area. Europe is not an optimum currency area. Key words: Optimum Currency Area, Monetary Integration, Currency, Economic and Monetary Union JEL Classification: E 42, F36 An optimum currency area (OCA) is a theoretical notion. Europe by nature is very diverse and therefore meets this criterion. Is Europe an Optimum Currency Area? Thus, Europe remains further than the currency unions of North America from the ideal of an optimum currency area. Political integration is still questioned as the CT is stuck in the approval process. One problem with the flippant claim in the beginning that Europe as a whole is an optimum currency area - is it really optimum? The judgement is made on the basis of the existing literature and available data for several criteria as a part of the OCA Theory. An optimum currency area (OCA) is an economic unit composed of regions affected symmetrically by disturbances and between which labour and other factors of production flow freely (Mundell, 1961). Populists in … De Grauwe, P. and W. Vanhaverbeke (1991), 'Is Europe an optimum currency area ? Economic union is so far in front of political union.... – A free PowerPoint PPT presentation (displayed as a Flash slide show) on PowerShow.com - … We find that asymmetric shocks tend to … Critical attitudes to the introduction of the common currency in the European Union are based above all on the Optimum Currency Area theories. An optimal currency area is often larger than a country. It speculates that there is an optimum geopolitical area … For instance, part of the rationale behind the creation of the euro is that the individual countries of Europe do not each form an optimal currency area, but that Europe as a whole does. Why the Eurozone is not an Optimal Currency Area . The paper shows that this theory is not an ideal yardstick for an assessment of EMU. Description of Optimum currency area. Downloadable (with restrictions)! A variety of measures suggests that labor mobility and the speed of labor market adjustment remain lower in Europe than in the United states. Much of the debate on the desirability of a monetary union in Europe has focused on the question of whether Europe can be described as an optimum currency area (OCA). The European Union is an Optimal currency area since it is a region that is symmetrically influenced by economic disturbances. The purpose of this thesis is to investigate whether Europe can be called an OCA or not. Other considerations of a economic and monetary union Please click on the following link: Stanford University: Ronald I. McKinnon’s Paper on “Optimum Currency Areas and the European Experience” and read the material. An optimum-currency–area index for European countries European Economic Review, 41 (3–5) (1997), pp. By all accounts, the Euro zone is not an optimal currency area. Due to the Single Market, Intra-EU trade increased from €800bn in 1992 to €2,800bn in 2011 (European Commission, 2012). This doesn’t make the European Union an optimal currency area, though. Why the Eurozone is not an Optimal Currency Area European Union Economics; Why is the Eurozone Not A Optimal Currency Area ?. It is an area where other economic factors like labor flow quickly. 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; An OCA works best when; 1.Countries within it are highly integrated with each other i.e. I fact-tagged the claim. Paul De Grauwe and Wim Vanhaverbeke () . CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): This paper aims to assess whether Europe is an optimum currency area (OCA) by examining synchronisation of business cycles and long-run output linkages in the EU countries. The Concise Encyclopedia of the European Union describes optimum currency area in the following terms: [1] An area covering two or more homogeneous economies, where the advantages of having a single currency outweigh the disadvantages. Diversification in production and consumption: Before the European Union founded it’s monetary area with common currency, questions such as whether the eurozone can be classed as a optimum currency area and whether the judgement to consolidate the European Union member states under common currency was in fact the correct decision. Optimum currency area theory (OCA) was developed in 1961 by Canadian economist Robert Mundell based on earlier work by Abba Lerner. This paper asks whether Europe is an optimum currency area. No 915, CEPR Discussion Papers from C.E.P.R. 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. Can it be proved that it wouldn't be slightly more economically efficient to drop Slovakia after all, or Portugal, or any individual country? It is completely immaterial to the functioning of a currency area how high labour mobility is. Methodology Scope of the study The research paper aims at analyzing the condition of Europe as a continent and the standard of Euro as a currency. The single currency, or the pegged currencies, fluctuate jointly vis-à-vis other currencies. countries that are very open to trade and trade heavily with each other form an optimum currency area: traded good prices are set worldwide if all goods are traded, domestic good prices must be flexible and the exchange rate does not matter for competitiveness. The presumption of the optimum currency area literature holds relatively well, i.e. Evidence from regional data', CEPR Discussion Paper no. The criteria to determine the optimum currency areas established by Robert Mundell have dominated the majority of the UME debates and the conclusions showed that Europe, made either of 6, 15 or more countries doesn’t represent an optimum currency area, because it … Thus, Europe remains further than the currency unions of North America from the ideal of an optimum currency area. Keywords: optimum currency area (OCA), nominal/real wage rigidity, employment 1. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. A variety of measures suggests that labor mobility and the speed of labor market adjustment remain lower in Europe than in the United states. You will be directed to Ronald I. McKinnon’s Papers. Discussion Papers Abstract: The debate on EMU has been very influenced by the traditional theory of optimum currency areas (OCAs). The most important pre-conditions are that the economies should be similarly affected by external shocks and … Trade in goods produced with different labour intensities amounts to indirect labour … Emin Ertürk, Derya Yılmaz, Işın Çetin, Optimum Currency Area Theory and Business Cycle Convergence in EMU, Handbook of Research on Global Indicators of Economic and Political Convergence, 10.4018/978-1-5225-0215-9.ch004, (67-91), (2016). 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. designed as such, the Eurozone is not currently operating as an optimal currency area. Evidence from Regional Data. The paper makes an. 761-770 Article Download PDF View Record in Scopus Google Scholar Introduction With the recently announced Brexit coming up, the call from other countries wanting to leave the European Union (EU) has become stronger. Peter Bofinger () . Despite the statute of sub-optimum currency area, there are still a series of arguments, both supportive and critical, for the settlement of an Economic and Monetary Union within the European space. The “McKinnon Criterion” states that countries in an optimum currency area should be open to trade and should do so profoundly with one another. 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. Insofar as regions within the OCA experience the same shocks, there is no obvious advantage to altering relative prices between them. However, many claimed it failed in doing so. Abstract. This is done by comparing the labour flexibility throughout Europe after certain macroeconomic shocks, which were normally processed by the exchange rates. Evidence from regional data', CEPR Discussion Paper no. Economic theory suggests that a common currency is more likely to be beneficial if coun try-specific shocks are mild and symmetric, whereas in the presence of major asymmetric shocks, floating exchange rates are more likely to be stabilizing. optimum currency area. Is Europe an Optimum Currency Area? 555. component. The topic is why is the Eurozone not an Optimal Currency Area?.This is a European union economics research paper. We find that asymmetric shocks tend to be more prevalent at the regional than at the national level in Europe. Discussion Papers Abstract: In this paper we contrast regional and national data on real exchange rate movements, the growth rates of output and employment, labour mobility and unemployment. 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. 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