Optimum currency area

1. Criteria

1.1. Labour mobility (Mundell)

1.1.1. Increased labor mobility throughout the area

1.1.2. Capital mobility and price and wage flexibility

1.1.3. A currency risk-sharing system across countries

1.1.4. Similar business cycles

1.2. Product diversification (Kenen)

1.2.1. What the most likely sources of substantial shows are?

1.2.2. shifts in spending patterns, which may be a consequence of changing tastes

1.2.3. Currency area member countries ought to be well diversified and producing similar goods

1.2.4. Countries whose production and exports are widely diversified and of similar structure form an optimum currency area

1.3. Openness (McKinnon)

1.3.1. Countries which are very open to trade and trade heavily with each other form an optimum currency area

1.4. Fiscal transfers

1.4.1. Countries that agree to compensate each other for adverse shocks form an optimum currency area

1.5. Homogeneous prefferences

1.5.1. Currency union member countries must share a wide consensus on the way to deal with shocks

1.6. Solidarity vs nationalism

1.6.1. When the common monetary policy gives rise to conflicts of national interests, the countries that form a currency area need to accept the costs in the name of a common destiny

2. The geographic area in which a single currency would create the greatest economic benefit.

3. Founders of OCA theory

3.1. Mundell

3.2. Kenen

3.3. McKinnon

4. Benefits

4.1. Benefits of a monetary union include the gains of increasing trade between the involved countries, because trade is no longer hampered by rapid changes of exchange rates.

5. Is EU an optimum currency area?

5.1. Asymmetry is a concern in the euro area, even though these sharp differences may be erased over time

5.2. Most economies of EU qualify for joining a monetary union

5.3. However, Europe is far from fulfilling the labour mobility criterion