Optimum currency area

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Optimum currency area by Mind Map: Optimum currency area

1. homogeneous preferences

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

2. Economic criteria

2.1. Labor mobility(Mundel criteria)

2.1.1. minimizing the costs of asymmetric shock within a currency area

2.2. Production diversification(Kenen)

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

2.3. Openness(McKinnon)

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

3. Political criteria

3.1. Fiscal transfers

3.1.1. Solidarity vs nationalism 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

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