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The equilibrium approach to optimum currency areas

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  • Filippo Cesarano

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    (Banca d'Italia, Ufficio Ricerche Storiche, Roma (ItaIY))

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    Abstract

    This paper contrasts the received view of optimum currency areas with the modernequilibrium approach. Setting Mundell's work against earlier analyses of monetary unions exposes the peculiarities of his theory, embedded in the static Keynesian paradigm. Mundell's hypothesis, constructed on the assumption of interregional factor immobility with regions spanning the country borders, leads to exogenous optimality criteria, which characterized the research program of the following decades (section 1). From the late 1990s, however, several papers emphasized the endogeneity ofoptimum currency area criteria on the basis of the new classical macroeconomics, overturning the traditional approach. Highlighting the implications of the Lucas critique, these contributions point at an alternative view of optimality, bringing the subject again into the realm of equilibrium theory (section 2).

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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9867/9749
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    Bibliographic Info

    Article provided by Banca Nazionale del Lavoro in its journal Banca Nazionale del Lavoro Quarterly Review.

    Volume (Year): 59 (2006)
    Issue (Month): 237 ()
    Pages: 193-209

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    Handle: RePEc:psl:bnlqrr:2006:23

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    Keywords: Currency;

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    References

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    1. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
    2. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
    3. Filippo Cesarano, 2006. "The Origins of the Theory of Optimum Currency Areas," History of Political Economy, Duke University Press, vol. 38(4), pages 711-731, Winter.
    4. repec:cto:journl:v:24:y:2004:i:1-2:p:163-170 is not listed on IDEAS
    5. Robert Barro & Silvana Tenreyro, 2007. "Economic Effects Of Currency Unions," Economic Inquiry, Western Economic Association International, vol. 45(1), pages 1-23, 01.
    6. De Grauwe, Paul & Mongelli, Francesco Paolo, 2005. "Endogeneities of optimum currency areas: what brings countries sharing a single currency closer together?," Working Paper Series 0468, European Central Bank.
    7. Filippo Cesarano, 1997. "Currency Areas and Equilibrium," Open Economies Review, Springer, vol. 8(1), pages 51-59, January.
    8. Mundell, Robert A., 1999. "A Reconsideration of the Twentieth Century," Nobel Prize in Economics documents 1999-5, Nobel Prize Committee.
    9. Cesarano, Filippo, 1985. "On the viability of monetary unions," Journal of International Economics, Elsevier, vol. 19(3-4), pages 367-374, November.
    10. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
    11. Fatas, Antonio, 1997. "EMU: Countries or regions? Lessons from the EMS experience," European Economic Review, Elsevier, vol. 41(3-5), pages 743-751, April.
    12. R. A. Mundell, 2000. "Erratum: A Reconsideration of the Twentieth Century," American Economic Review, American Economic Association, vol. 90(5), pages 1535-1535, December.
    13. Krugman, P., 1993. "What Do We Need to Know About the International Monetary System?," Princeton Studies in International Economics 190, International Economics Section, Departement of Economics Princeton University,.
    14. Barro, Robert & Alesina, Alberto, 2002. "Currency Unions," Scholarly Articles 4551795, Harvard University Department of Economics.
    15. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May.
    16. Gil-Pareja, Salvador, 2003. "Pricing to market behaviour in European car markets," European Economic Review, Elsevier, vol. 47(6), pages 945-962, December.
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    Cited by:
    1. Filippo Cesarano, 2006. "Optimum currency areas: a policy view," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(239), pages 317-332.
    2. Filippo Cesarano, 2006. "Optimum currency areas: a policy view," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(239), pages 317-332.

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