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Is Europe an Optimum Currency Area?

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  • Eichengreen, Barry

Abstract

An optimum currency area is an economic unit composed of regions affected symmetrically by disturbances and between which labor and other factors of production flow freely. The symmetrical nature of disturbances and the high degree of factor mobility make it optimal to forsake nominal exchange rate changes as an instrument of adjustment and to reap the reduction in transactions costs associated with a common currency. This paper assesses labor mobility and the incidence of shocks in Europe by comparing them with comparable measures for Canada and the United States. Real exchange rates, a standard measure of the extent of assymetrical disturbances, remain considerably more variable in Europe than within the united states. Real securities prices, a measure of the incentive to reallocate productive capital across regions, appear considerably more variable between Paris and Dusseldorf than between Toronto and Montreal. A variety of measures suggests that labor mobility and the speed of labor market adjustment remain lower in Europe than in the United states. Thus, Europe remains further than the currency unions of North America from the ideal of an optimum currency area.

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Bibliographic Info

Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt40m5g6pp.

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Date of creation: 01 Oct 1990
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Handle: RePEc:cdl:econwp:qt40m5g6pp

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Keywords: exchange rates; optimum currency area; Social and Behavioral Sciences;

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  1. Boltho, Andrea, 1989. "European and United States Regional Differentials: A Note," Oxford Review of Economic Policy, Oxford University Press, vol. 5(2), pages 105-15, Summer.
  2. Barry Eichengreen., 1989. "The Comparative Performance of Fixed and Flexible Exchange Rate Regimes: Interwar Evidence," Economics Working Papers 89-119, University of California at Berkeley.
  3. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  4. Eichengreen, Barry, 1990. "One Money for Europe? Lessons from the US Currency Union," Department of Economics, Working Paper Series qt6ks1k831, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Eleanor H. Erdevig, 1986. "Federal funds flow no bargain for Midwest," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-10.
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