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The Endogeneity of the Optimum Currency Area Criteria

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  • Frankel, Jeffrey A
  • Rose, Andrew K

Abstract

A country's suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialized countries, the authors uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 108 (1998)
Issue (Month): 449 (July)
Pages: 1009-25

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Handle: RePEc:ecj:econjl:v:108:y:1998:i:449:p:1009-25

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  1. George S. Tavlas, 1993. "The ‘New’ Theory of Optimum Currency Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 663-685, November.
  2. Bayoumi, T. & Eichengreen, B., 1994. "One Money or Many? Analysing the Prospects for Monetary Unification in Various Parts of the World," Princeton Studies in International Economics 76, International Economics Section, Departement of Economics Princeton University,.
  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  4. Bayoumi, Tamim & Eichengreen, Barry, 1994. "Monetary and exchange rate arrangements for NAFTA," Journal of Development Economics, Elsevier, vol. 43(1), pages 125-165, February.
  5. Tamim Bayoumi and Barry Eichengreen., 1992. "Is There a Conflict Between EC Enlargement and European Monetary Unification?," Economics Working Papers 92-188, University of California at Berkeley.
  6. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
  7. Barry Eichengreen., 1987. "Real Exchange Rate Behavior under Alternative International Monetary Regimes: Interwar Evidence," Economics Working Papers 8755, University of California at Berkeley.
  8. De Grauwe, Paul & Vanhaverbeke, Wim, 1991. "Is Europe an Optimum Currency Area? Evidence from Regional Data," CEPR Discussion Papers 555, C.E.P.R. Discussion Papers.
  9. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
  10. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley.
  11. Luca Antonio Ricci, 1997. "Exchange Rate Regimes and Location," IMF Working Papers 97/69, International Monetary Fund.
  12. Cohen, Daniel & Wyplosz, Charles, 1989. "The European Monetary Union: An Agnostic Evaluation," CEPR Discussion Papers 306, C.E.P.R. Discussion Papers.
  13. Eichengreen, B., 1992. "Should the Maastricht Treaty be Saved?," Princeton Studies in International Economics 74, International Economics Section, Departement of Economics Princeton University,.
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