The theory of optimum currency areas (oca) was first published by robert mundell in 1961 it shows that countries could join a monetary union if the costs of doing so are lower than the benefits basically, a monetary union is an irrevocable fixed exchange rate system. Money is a convenience and this restricts the optimum number of currencies in terms of this argument alone, the optimum currency area is the world, regardless of the number of regions of which it is composed there are two other factors that would inhibit the creation of an arbitrarily large number of currency areas. 19 holly snaith, narratives of optimum currency area theory and eurozone governance, new political economy, 2014, 19, 2, 183crossref 20 chee-heong quah , revisiting business cycles in the eurozone: a fuzzy clustering and discriminant approach, acta oeconomica , 2014 , 64 , 2, 161 crossref. Extended version of a luncheon speech presented at the aconference on optimum currency areas,@ tel-aviv university, december 5, 1997 it is a great satisfaction to be the recipient of so much kindness occasioned by my 1961 article on optimum currency areas i would like to tell you a little about how. Optimum currency areas and the euro - duration: theory of relativity explained in 7 mins - duration: optimal currency areas - duration:.
Unfortunately, it turned out that optimum currency area theory was essentially right, erring only in understating the problems with a shared currency and now that theory is taking its revenge references de grauwe, paul, managing a fragile eurozone, voxeu, may 2011. Theory of optimum currency area in the second half of the 1980s interest in monetary integration was rekindled and the members of the european union faced an emu question, concerning the timing and. 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. Mundell's earlier classic article, the theory of optimum currency areas published in 1961 in the american economic review comes down against a common monetary policy—and seems to argue in favor of making currency areas smaller rather than larger.
A national currency however, was considered an axiom in his 1961 article on optimum currency areas, mundell radically reformulated the problem of different exchange rate systems, by posing a new and fundamental question. A look at the economics preconditions and political backstops required for a successful oca. Regions as optimal currency areas2 only after the idea of european integration took hold in the second half of the twentieth century was mundell's theory practically applied to an international entity, that is, the eurozone. 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 1960s as an analytical framework for numerous debates on the validity of the creation of a european currency. Traditional optimum currency area criteria, interpreted in terms of optimal real stabilization policy, are only useful if the exchange rate is able to effectively perform the task of short-term stabilization (output or balance-of-payments) to which it is assigned.
A theory of optimum currency areas it is patently obvious that periodic balance-of-payments crises will remain an integral feature of the international economic system as long as fixed ex. The 'new' theory of optimum currency areas george s tavlas highbrow opinion is like a hunted hare if you stand long enough it will come back to the place it started from dennis robertson 1. Theory of the optimum currency areas was fully developed during the debates of the benefits and the costs of the particular exchange rates regimes after the world war ii that time, most of the countries fixed their currency to the us dollar. Optimum currency area (oca) theory optimum currency area (oca) theory originates from two seminal articles in the early 1960s by the economistsmundell(1961)andmckinnon(1963.
2 the main elements of the oca theory 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. Optimum currency area theory (oca) states that specific areas which are not bounded by national borders would benefit from a common currency the theory holds that a geographical area should adopt a fixed exchange rate administration between currencies or a single currency within its geographic boundaries optimum currency area theory can benefit a region by significantly increasing trade.
Articles the optimum currency area theory and the emu an assessment in the context of the eurozone crisis jennifer jager, kurt a hafner the eurozone crisis has revealed certain shortcomings of the emu, such as its vulnerability to asymmetric shocks and its inability to act as predicted by the theory of optimum currency areas. Title: a model if an optimum currency area created date: 7/11/1997 9:42:33 am. A theory of optimum currency areas created date: 20160808043310z.
The optimal currency area (oca) theory had its primary test with the introduction of the euro as a common currency in many european nations eurozone countries matched well with mundell's criteria for successful monetary union, providing the impetus for the introduction of a common currency. This article aims at providing an eclectic analysis of the theory of optimum currency areas (ocas) although the basic tenets of the theory were anticipated during the late 1940s and the 1950s, the theory was developed and maturated in three highly influential papers of mundell (1961), mckinnon (1963) and kenen (1969. In theory, an optimal currency area could also be smaller than a country 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.
Optimal currency area theory ignores financial markets completely, along with monetary policy and central banks quite curious for a theory about monetary integration maybe this a clue to why the euro-architects did not find the theory all that helpful. 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 economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed.