A THEORY OF OPTIMUM CURRENCY AREAS MUNDELL PDF

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 terms of trade between the West and the East deteriorate. 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.

Thus, the currency union might not be formed based on those areaz characteristics. Hence, a region of Germany could join with a region of France to create their own currency and abandon the mark and the franc. Scott Adjustment Under Fixed argument for flexible assume bank can expand based on national capital mobility causes unemployment central banks common currency currency area comprising degree of factor degree of area East Econ economists entities exchange rates based experimented with flexible factor immobility factors are mobile fixed exchange rates flexible ex flexible exchange rates flexible exchange system gions gold standard inflationary pressure internal factor mobility International Adjustment International Disequilibrium interregional J.

Here asymmetric shocks are considered to undermine the real economy, so if they are too important and cannot be controlled, a regime with floating exchange rates is considered better, because the global monetary policy interest rates will not be fine tuned for the particular situation of each constituent region.

This dilemma can be resolved through mobility of the factors of production, and the labor factor in particular.

At the top of the list is an absence of frequent, large-scale asymmetrical shocks and mobility in the factors of production. Robert Mundell laid the theoretical foundations for the European Monetary Union. For work that led to the euro, not for his supply-side theory”. Views and Commentaries for Views Read Edit View history. For Mundell, money illusion of this type cannot be expected to last for very long.

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Some sectors in the OCA might end up becoming concentrated in a few locations. First, the argument that floating exchange arrangements are superior to fixed exchange arrangements or to a common currency for mitigating the effects of asymmetrical shocks is based, as Mundell’s article explicitly points out, on the existence of money illusion.

Robert Mundell and the Theoretical Foundation for the European Monetary Union

He also found that the Plains would not fit into an optimal currency area. Supposing that the currency is managed properly, the larger the area, the better. However, it has lower labour mobility than the United States, possibly due to language and cultural differences.

In contrast with the previous model, asymmetric shocks are not considered to undermine the common currency because of the existence of the common currency. The notion of a currency that does not accord with a state, specifically one larger than a state — formally, of an international monetary authority without a corresponding fiscal authority — has been criticized by Keynesian and Post-Keynesian economistswho emphasize the role of deficit spending by a government formally, fiscal authority in the running of an economy, and consider using an international currency without fiscal authority to be a loss of “monetary sovereignty”.

Optimum currency area

However, if the currency union was established anyway, its member-states would trade so much more that, in the end, the OCA criteria would be met. 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 prices and in price levels generally, thus offsetting the effect of the decline in demand for forestry products produced in the region.

An empirical analysis of regional business cycles” PDF.

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Optimum currency area – Wikipedia

Firstly, the self-fulfilling effect’s impact may not be significant. Mundell’s work can be cited on both sides of the debate about the euro. A harvest failurestrikesor war, in one of the countries causes a loss of real income, but the use of a common currency or foreign exchange reserves allows the country to run down its currency holdings and cushion the impact of the loss, drawing on the resources of the other country until the cost of the adjustment has been efficiently spread over the future.

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 currenct threatened.

The Post-Keynesian theory of Mundelk holds that government deficit spending creates money, that ability to print money is fundamental to a state’s ability to command resources, and that “money and monetary policy are intricately linked to political sovereignty and fiscal authority”.

Center for Full Employment and Price Stability. In what circumstances could it be of benefit for Western Canada and the Western United States to join together to create a Western currency, or theorh the Eastern parts of the two countries to create a currency peculiar to the East of the continent?

Currency unions International economics Monetary policy.

Views & Commentaries

This Canadian economist has strong ties in Europe: Published by Mundell in[3] this is the most cited by economists. Mundell was an ardent supporter of the euro, of which he is considered the godfather.

The potential disadvantages would come from the elimination of the exchange rate between participants in the union: 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. Second, within a single country, capital mobility can take the place of labor mobility in facilitating adjustment.