The Theory of Optimum Currency Areas Essay

The Theory of Optimum Currency Areas Essay

Length: 1718 words (4.9 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

The theory of optimum currency areas (OCA) explores the conditions under which a common currency can maximize the economic efficiency of a region. It strives to identify the essential characteristics for forming a common currency zone as well as its possible costs and benefits. The research has also provided much insight into the area of optimum exchange rate management.
The phrase ‘optimum currency area’ was first coined by Mundell in 1961 in his seminal paper entitled “A Theory of Optimum Currency Areas”. Since then the theory has seen little development and the subject area has often lacked attention from economists. However, the formation of a European Monetary Union (EMU) has stimulated a resurgence of interest in the topic. (Citation)
The creation of the EMU has been an ambition of the European Union (EU) since the late 1960s. However, the timeline for achieving the EMU and a common currency was not agreed upon until the signing of the Maastricht Treaty of 1992. The treaty eliminated the national barriers to the movement of goods, labour and capital within the EU, as well as planning the creation of the euro currency and the European Central Bank. (Bean, 1992) The euro was finally adopted on the 1st Dec 1999 by eleven of the EU countries - as well as the Vatican, Andorra, Monaco and San Marino - and has subsequently been expanded further to Greece, Slovenia, Cyprus, Malta, Slovakia, Montenegro and Estonia. (Citation)
When Mundell introduced the OCA theory, the EMU was not a consideration and it was merely seen as an academic question. Mundell began by defining a currency area as “a domain within which exchange rates are fixed” and posed the prominent question “What is the appropriate domain of a currency area?”. To tackl...


... middle of paper ...


...f incomes and extent of trade amoung the members. The OCA line is downward sloping as the advantages of a common currency depend positively on trade and negatively on income correlation. The higher and further right the points are the more benefitial a common currency would be. Points that are low and left should float their own individual currency. He declared that a common currency for Germany, Belgium, Luxembourg and Netherlands would be advantageous but would be a hindrance for Europe as a whole. However, Frankel outlined that “The OCA Criterion Might Be Satisfied Ex Post, Even If Not Ex Ante”. He expanded by stating that through the formation of a common currency area countries that were below the OCA line could end up above it. Frankel indentified this would happen due to increased trade integration which causes a higher income correlation. (Frankel, 1999)

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

The Crypto Currency: Bitcoin Essay

- The Crypto Currency: Bitcoin Prelude There are lots of ways to make money: You can earn it, find it, or counterfeit it. Or, if you are Satoshi Nakamoto, you can create it. In November 2008, a mysterious entity going with the persona "Satoshi Nakamoto" published a research paper outlining his design for a new digital currency that he called bitcoin. None of the veterans had heard of him, and what little information could be gleaned was murky and contradictory. On his online profile, he said he is from Japan....   [tags: Currency ]

Better Essays
1487 words (4.2 pages)

Using Conventional Wisdom That Conservative Investors Should Avoid Exposure On Foreign Currency Risks

- Question 1) In relation to the article abstract, conventional wisdom that conservative investors should avoid exposure to foreign currency risks is wrong in relation to long-term investors. As with any investment, if there is any concern that the investment or currency for that matter could depreciate or decrease, hedging the initial investment with an investment in a different market can potentially reduce risk. Currency diversification will further the effects of hedging in case of market shocks in similar economies and additionally emphasizes the importance of inflation risk....   [tags: Inflation, Currency, Exchange rate]

Better Essays
718 words (2.1 pages)

Essay on Electronic Currency : A Form Of Digital Currency

- The first transaction using bitcoins, a form of digital currency, occurred in early 2009. It wasn’t until around the middle of 2013, that bitcoins transactions actually started to surge in the online market. The unregulated digital currency quickly got worldwide attention of regulatory agencies and banks due the anonymous nature of transactions. This decentralized form of currency raised many questions and concerns because of the pure nature of the virtual currency. The accounting profession had no central guidance on how to classify and treat this new form of digital currency....   [tags: Currency, Money, Exchange rate, IRS tax forms]

Better Essays
1772 words (5.1 pages)

Description of School Currency System Essay

- How do students become financially prepared for the real world. Students go through school for quite a few years, they learn reading, math, science, etc. But there is not a finance class to teach students the basics of finance. Now you might think that students wouldn't take the class. That is why you could implement a school currency system. A currency system would be helpful in many ways, although many people are against it, because there could be some flaws in the system. Helping students improve grades, improving daily attendance, teaching important life skills, and improving a students level of responsibility, are reasons why a currency system should be implemented in school....   [tags: school currency, currency system, personal finance]

Better Essays
764 words (2.2 pages)

An Economic Analysis Of Crypto Currency Essay

- An economic analysis of crypto currency Introduction (1000 words) Last year, I read the news and it said something about some guy who bought some kind of currency called “the bitcoin”. This person bought a very small amount of bitcoins, forgot about it, and then realised he had them 6 years later. His bitcoins weren ow worth almost one million dollars. I had never even heard of the bitcoin i did not know what it was, neither had I ever seen or used one. I did not even know how to use them. So I decided to do my dissertation about this very interesting topic....   [tags: Money, Currency, Lower case]

Better Essays
2382 words (6.8 pages)

Essay on Bitcoins: Revolution of Digital Currency

- The internet was a phenomenon that enthralled excitement in people during the 1990's when the internet became public and has since evolved to become a staple of our society. The evolution of the internet has been likened to that the commerce industry may be facing with the increasing popularity of Bitcoins and other forms of digital currencies entering the market (Tindell). Bitcoin is a digital currency that was created by a person obscured under the pseudonym, Satoshi Nakamoto (Maurer), on November 1, 2008....   [tags: Online Currency, Peer to Peer]

Better Essays
2242 words (6.4 pages)

Bitcoin : The Cryptic Currency Essay

- Bitcoin The cryptic currency Bitcoin is an electronic currency created in 2007 by an unknown person using the alias Satoshi Nakamoto. While he is on record as living in Japan, it is speculated that Nakamoto may be a collective pseudonym for more than one person or as Hongkiat suggests “that his name was just a mashup of popular Japanese companies, (SAmsung, TOSHIba, NAKAmichi, MOTOrola)” (HONGKIAT , 2016). In 2008 Neal Kin, Vladimir Oksman, and Charles Bry file an application for an encryption patent application....   [tags: Money, Currency, United States dollar]

Better Essays
1563 words (4.5 pages)

Essay on The Exchange Rate Of Currency

- The exchange rate simply refers to the value of a currency in terms of another. In essence, the exchange rate of a country’s currency determines the strength of that currency, or its weakness in relation to other currencies. With the increased extent of globalization, currency exchanges have become commonplace in virtually all countries (Zhang). However, the US dollar remains the mostly used form of currency, and usually serves as a standard measure for all the others, which are demanded by the inhabitants of other nations, as well as those who wish to spend the currency forms in the other countries....   [tags: United States dollar, Currency, Euro, Dollar]

Better Essays
1100 words (3.1 pages)

Viable Crypto Currency or Investment Bubble Essay

- Imagine a currency that can be sent around the globe instantly from one client to another, without any hefty transaction fees. Although, this achievement is seemingly impossible, Bitcoin, a form of digitalized monetary value, accomplishes just that. Until recently, money has always been perceived as a physical note or coin that can be used to make transactions. However, Bitcoin is basically an encrypted digital block that can be stored in an online wallet and securely stored, sent, and received via a special network on the Internet (Friedman)....   [tags: financial world, bitcoin, virtual currency]

Better Essays
1414 words (4 pages)

United States Dollar as Reserve Currency Essay

- In February of 2011, the International Monetary Fund (IMF) shocked the world by calling for the United States dollar to be replaced as the global world currency (Rooney, 2011). In one report, the world’s dirty little monetary secret had been exposed; faith in the US dollar was faltering. Since then, international attitudes toward the US dollar have only gotten worse. With 2013 debt at approximately 105 percent of gross domestic product and a negative outlook rating from Standard’s and Poor, the United States is looking like an insolvent bank no one wants to keep their money in....   [tags: global world currency, International Money]

Better Essays
1881 words (5.4 pages)