Friedman recommended floating exchange rates for larger and relatively closed economies, while regarding smaller but more open economies, he argued: The synchronisation of business cycles is an important ele- ment in the discussions of endogeneity and specialisation hypothesis, trade integration and real convergence hypothesis of this study. It was the combined result of the efforts in late s and the early s that were taken towards the monetary unification of Europe. Reforms in Eastern Europe. The American Economic Review, 51 4 , —

The Political Economy of Monetary Union. Fleming stresses the importance of simi- larities in inflation rates when countries decide to form a monetary union. Brussels on a single money. Swoboda Eds , Monetary problems in the international economy. Second, a situation in which a country is divided into two distinct regions,3 say region A and region B, and an asymmetric demand shock affects region B negatively. In such cases of small open economies with balance of payments prob- lems, McKinnon suggests that these economies should rely more on alter- native instruments e.

The theory of optimum currency areas : a literature review

Ustanove Ekonomski vroz, Zagreb. Brussels on a single money. Canadian Journal of Economics, 3 2— Swoboda EdsMonetary problems in the international economy.

the theory of optimum currency areas a literature review broz

On the indeterminacy of equilibrium exchange rates. What brings countries sharing a single currency closer together? If unemployment is prevented in both the regions, inflation in both regions cannot be avoided.

the theory of optimum currency areas a literature review broz

Sweden, Finland, Austria; Schengen Treaty takes effect some countries Among other things, the Treaty of Amsterdam updates Maastricht and further prepares eastward expansion; Stability and Growth Pact Eurozone introduced Members: His paper analysed the effects of shocks to particular export products i.


An implication of this is that the countries could fail in satisfying the OCA criteria ex- post, even though they did not ex-ante. According to the Lucas Critique, a prediction based on historical data would be invalid if some policy change alters the relationship between relevant variables.

Economic effects of currency unions. Enter the email address you signed up with and we’ll email you a reset link. Mundell Mundell defined the OCA as the geographic area, and not the national territory, in which the goals of internal balance full employment associ- ated with stable prices, i.

The second approach deals with the choice of an optimal exchange rate regime in the context of stabilisation plans. The trade effect of the euro in historical perspective. The OCA theory determines the conditions which countries need to satisfy in order to make the monetary union more attractive, that is, to ensure that the benefits of the monetary union exceed its costs.

In such a monetary union, with a regional central bank assigned the objective of price stability, the less developed economy face the following situations: Papers and Proceedings, 37 2— Monetary union and economic integration.

The theory of optimum currency areas : a literature review – EconBiz

Ingram listed the integration of financial markets among the conditions of monetary union. Even though many additional criteria are introduced in this modern phase, traditioal contributions are still relevant. However, if the same economies combine together and form a currency union, then the resulting economy will be more diversified with pegged exchange rate.


On exchange rate optimym. Chicago 17th Edition Broz, Tanja.

Canada and flexible exchange rates. If wages are not sticky in both the countries, the excess demand in the West caused by a productivity shock in the East would raise wages in that country, leading to a backward shift in currncy aggregate supply curve decline in the aggregate supply of goods and services and, hence, a rise in the price level.

The American Economic Review, 51 4— A Model of an Optimum Currency Area. National Bureau of Economic Research.

The Theory of Optimum Currency Areas: A Literature Review

Journal of Political Economy, 3— Other unions will do the same because if they do not, their members will end up with lower real brlz. This raises the question: Highly diversified economies can afford to have flexible exchange rates, whereas undiversified economies are less able to deal with exchange rate fluctuations.

An exploration in the theory of exchange-rate regimes.