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...
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...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)
In conclusion, the European Union has “merged” the countries of Europe. It has developed a common currency called the Euro’s, and a Parliament located in Belgium, Luxembourg, and France. Also, ALL of the countries of the Union are affected when one country is affected. This is important because the continent of Europe had become very weak after the wars and they needed to strengthen, and the European Union keeps the countries of Europe strong and economically fit.
Economic integration is the joining of economic policies between different states/regions. This eliminates tariff and non-tariff barriers to the flow of goods, services and factors of production between the regions. Economic integration has varying levels referred to as trading blocs; these are a form economic integration. A trading bloc is a group of nations that have been made a bilateral or multilateral agreement. There are four types of trading blocs. The least advanced level is the Free Trade Area. The features of this level is that reduced tariff barriers between signatories, which at times are abandoned altogether and there is free movement of labour and capital and the non-member countries have an independent set of tariffs against member countries. The second level of economic integration is the Customs Union. This is a Free Trade Agreement plus a common external tariff. Member countries agree to reduce tariff barriers among themselves and they have in common, this is referred to as tax harmonisation. The Common Market is the third level of trade blocs. This has features of the Customs Union plus free movement of capital and labour and some policy harmonisation such as similar trade policies to prevent certain member countries having an unfair advantage. The European Union is an example of a Common Market and is an economic and political partnership that involves 28 European countries. It allows goods and people to be moved around and has its own currency, the euro, which is used by nineteen of the member countries (The UK excluded). It also has its own parliament and sets rules in a wide range of areas such as transport,...
The European Union cooperation all started with economic integration. Since the beginning of the ECSC in 1952 until now one of the major forces but also one of the major weaknesses of the EU has been their will for a common market and a monetary union. The single market was achieved in 1992 with the entrance into function of the Maastricht treaty. This treaty greatly influenced how states would have to deal with external border control and the free movement of the people because what the Maastricht treaty did was not only opening a single market, but also allowing people, goods and services to move freely across European Union member states. Economic integration has explained by Nevin has usually 5 level which goes from he lowest o he highest level of cooperation. The first level of integration is the preferential tariff which only allows st...
The European Union today is a political and economic entity that controls in a single market located mostly in Europe exploiting Euro as a single currency uniting the vast majority of its members. The market that all European Union members share provides free trade of goods and services as well as a common external tariff. One might argue that the European Union would not perceptible its current influence had it not been for the introduction of the Euro. Speaking of the benefits of the Euro, one can name the elimination of exchange rate problems, creation of a single financial market, providing price stability, low interest rates as well as being a political symbol of unity and commitment to the Union. Today, Euro is the second reserve currency in the entire world - a fact that clearly speaks for itself of its value in the global market.
Many people would agree that Europe is a continent in which regions identify with each other even if they are not part of the same country. For that reason, as well as others, in 1957 the Treaty of Rome "declared a common European market as a European objective with the aim of increasing economic prosperity and contributing to 'an ever closer union among the peoples of Europe'" (www.euro.ecb.int). Later, in 1986 and then in 1992, the Single European Act and the Treaty of European Union tried to build on the previous treaty to create a system in Europe in which one currency could eventually be used all over the land under the heading of the Economic and Monetary Union. (www.euro.ecb.int) However, the question remains, why would the leaders of various European nations want to create one currency when the rights of national sovereignty have always been an issue for countries all over the world. Why, in 1998 did they create the European Central Bank, and why in "The third stage of EMU... on 1 January 1999, when the exchange rates of the participating currencies were irrevocably set" (www.euro.ecb.int) did eleven, and later twelve, countries link themselves economically in a way that has never been done before?
Supported by the domestic intuitional framework, which details that political outcomes are results of a variation in the “rules of the game,” producers are the ones to benefit from a floating exchange rate. Interests are translated into policy via domestic institutions. For example, Congress and farm subsidies. Individuals are interested in their own well-being. Winners gain by lobbying because they prove better than their opponent. In this framework, politicians decide based on majority principles and an increased demand for a country’s products. With more money flow, businesses have incentives to increase domestic prices (Wellhausen 10-2-14). Being so, exchange rate policy is homily political in that it is chosen by a differentiation in the “rules of the game.” Again, everyone sets out to seek their own best interests. Within this same framework, politicians find themselves in a catch-22: although they choose that which is to come, in doing so, they face vast amounts of pressures. Special interest groups and mass public opinions alone carry enough weight to affect any course profoundly and profusely (Frieden, p.
...ause they cannot gauge the governing council’s true thinking. The fourth concern of the implementation of a solitary currency in Europe is that of who is in control?4 Officially the ECB is independent and answers to no political nation. But can one council possibly have the ability to control and balance eleven different economies at the same time? Some say no, but if it can even succeed only a little bit what is good for one economy may not be good for another. This leads into the final concern: Does one economy fit all? When the economy is in the basement the first thing that politicians ask for is a cut in interest rates. In the beginning this may give the desired results but in the long run may entirely destroy an economy. It becomes macroeconomics versus microeconomics.4 What is good for the economy as a whole may not be good for every sector and region.
The net values of Belarus imported goods and services from other countries exceeded its export of goods and service to other countries creating a large Current Account Deficit. The reason Belarus a former Soviet republic scraped the currency trading restriction is due to the fact its political leadership allowed the Belarus national currency ruble to depreciate as part of a strategy to reduce the current account deficit. The unification of the exchange rates will allow the currency market ability to function as before. The overheated economy under a loose monetary policy created this crisis and the difficulties will be overcome by abolishing the restriction on currency trading. The political promise of 50% increase in wages to the government workers have impacted with no real values other than buying foreign currency and goods. According to Arkhipov and Abelsky (2011), abolishing the currency trading restriction is necessary given the current practice of doin...
The Gold Standard, 1890-1926.” Journal of Global History 3 (2008), 313-335. Eichengreen, Barry. A. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996. Galbraith, John.
The theme of this essay outlines two things. One, the key elements of Bretton woods system and second, the characterisation of Bretton woods system by Ruggie as ‘embedded liberalism’, and how far he succeeds in it. The Bretton woods system is widely referred to the international monetary regime, which prevailed from the end of the World War 2 until the early 1970s. After the end of the World War 2, the need of international monetary framework to boost trade and economic; growth and stability, was important. Taking its name from the site of the 1944 conference, attended by all forty-four allied nations; the Bretton Woods system consisted of four key elements. First, to make a system in which each member nation has to fix or peg his currency exchange rate against the gold or U.S. dollar, as the key currency. Secondly, the free exchange of currencies between countries at the established and fixed exchange rate; plus or minus a one-percent margin. Thirdly, to create an institutional forum, so-called International Monetary Fund (IMF), for the international co-operation on money matters: to set up, stabilize, and watch over exchange rates. Fourth, to remove all the existing exchange controls limiting (protectionism) policies by the members, on the use of its currency for international trade. In practice the first scheme, as well as its later development and final demise, were directly dependent on the preferences and policies of its most powerful member, the United States. According to John Gerard Ruggie, 1982, this Bretton woods system of monetary co-operation represented the type of liberalism which characterise “domestic social economic stability along with a liberal trading order.” He referred this system as ‘embed...
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
There have been deliberations about the ideal exchange rate system for a period of time, dazzling the advancement of the world economy and the manner of monetary policy.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
The first reason is the issue of euro. Considering a strong correlation between money and collective national identity, money can be used as an effective tool in facilitating the integration of diverse identities (Risse, 2003). Actually, the principal goal of the issues of euro is to promote the unification of the monetary system and foster integration of the economy in order to ease economic activities betwee...
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...