Highly diversified economies can afford to have flexible exchange rates, whereas undiversified economies are less able to deal with exchange rate fluctuations. John Wiley and Sons, Inc. Friedman recommended floating exchange rates for larger and relatively closed economies, while regarding smaller but more open economies, he argued: The OCA is not the world Mundell, , p. It means that if the business cycles of currency union members are synchronised, then the cost of not having its own monetary policy that would fight against disturbances is minimised. Journal of Political Economy, 3 , — The role of monetary policy.

On exchange rate unification. Mundell and Alexander L. Subsequent literature in this area introduces various rigidities and imperfections into the modelling of currency unions. Macroeconomic policy during a transition to monetary union. On the practical grounds, the theory of OCA showed its success by the formation of the euro as a single currency.

However, the theory did not suffer complete stagnation during these two decades.

the theory of optimum currency areas a literature review broz

Exchange rates and the political economy of macroeconomic discipline. Does a country gain maximum benefits when it uses its own currency? Countries confronted with identical literaturd might need different policy responses to such shocks due to differences in their initial economic positions.

Rules, discretion and reputation in a model of monetary policy. Political interference in monetary affairs implies that given the realization of an economic shock, there still is uncertainty about the future actions of monetary authorities since such actions will be inluenced by future politi- cal events. No need to say that there is now substantial empirical literature which backs the non-efficient foreign exchange markets hypothesis. A Plan for a European Currency.


The theory of optimum currency areas : a literature review

Shocking Aspects of European Monetary Unification. The existence of high labour mobility within the two regions will shift labour from East to West, resulting in no unemployment in East and no inflationary pressure in West.

The Political Economy of Monetary Union. On exchange rate unification. The theory of optimum currency areas.

Federal Reserve Bank of St. Boulding calls them macroeconomic paradoxes. The fourth section highlights the reasons for the virtual abandonment of academic research in the field during most of the s and s. First part reviews traditional contributions, while second part reviews modern views on optimum currency areas theory. Open Economies Review, 2 3— It was their rejection of the paradigm of fixed exchange rates regime that set them apart from Mundell.

In such cases of small open economies with balance of payments prob- lierature, McKinnon suggests that these economies should rely more on alter- native instruments e.

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

International Economics Section, Department of Economics. Economic effects of currency unions.


Exchange rate regimes in an increasingly integrated world economy Vol. Neumeyer delves deeper into the role of political authorities by differentiating between the economic and non-economic political shocks.

American Economic Review, 91 2— Exchange rate regimes in the transition economies: American Economic Review, 85 3— What do we need to know about the international monetary system?

The synchronisation of business areaas is an important ele- ment in the discussions of endogeneity and specialisation hypothesis, trade integration and real convergence hypothesis of this study.

Suppose a less diversified country producing only one product, which it also exports, is hit by a negative demand shock, resulting in reduction in its export sales. Mundell Mundell defined the OCA as the geographic area, tjeory not the national territory, in which the goals of internal balance full employment associ- ated with stable prices, i. The Economic Journal,— Ustanove Ekonomski institut, Zagreb. Optimal taxation versus the cost of multiple currencies.

the theory of optimum currency areas a literature review broz

A history of thought on economic integration.