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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The four often cited criteria for a successful currency union are: The benefits mundell 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 currency, attributable mainly to the expansion of its area of transactions, from which all financial markets would also benefit.

Optimum currency area – Wikipedia

Such stimulus may not be possible if states in a monetary union are not allowed to run sufficient deficits. Paradoxically, his theory has been used by numerous economists tueory oppose the European Monetary Union and question its chances of success. 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.

In our Canadian example, the depreciation of the Western currency leads to a rise in import optimuj and in price levels generally, thus offsetting the effect of the decline in demand for forestry products produced in the region. The terms of trade between the West and the East deteriorate.

On every occasion when a social disturbance leads to the threat of a strike, and the strike to an increase in wages unjustified by increases in productivity and thence to devaluation, the national currency becomes threatened.

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Supposing that the currency is managed properly, the larger the area, the better. 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. If specialization increases, each country will be less diversified and will face more asymmetric shocks; weakening the case for the self-fulfilling OCA cufrency. 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.

The Journal of Economic Perspectives. These considerations dominated scientific debate on the European Monetary Union, with most analysts s that Europe, whether made up of six, eleven, or fifteen countries, did not constitute an optimum currency area, as it met the above-mentioned criteria only partially.

In the circumstances, the main argument for exchange flexibility is the possibility or the mnudell of adopting an exchange rate different from that of the rest of the world. That also explains why he ccurrency an increasing number of countries gravitating toward the two major currencies of the 21st century, the dollar and the euro.

Robert Mundell and the Theoretical Foundation for the European Monetary Union

Second, within a single country, capital mobility can take the place of labor mobility in facilitating adjustment. Journal of Economic Perspectives. The United States is a good example: 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. When a state in the U. Let us imagine a change in consumer tastes that pushes up the demand for automobiles and compresses that for forestry products.

If capital and labor shift from the industries that have suffered from a decline in demand toward those enjoying surplus demand, from the West toward the East in our example, balance can be restored in the stability of prices and employment.


Views & Commentaries

Some sectors in the OCA might end up becoming concentrated in a few locations. However, he found the fit of the Southeast and Southwest to be questionable. 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.

Consider goods market interaction as an example: Mundell takes the example of North America. However, another school of thought argues that some of the OCA criteria are not given and fixed, but rather they are economic outcomes i.

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

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. 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 munrell probability of asymmetrical shocks.

An optimal currency area is often larger than a country. An empirical analysis of thwory business cycles” PDF. 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.

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