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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 or 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 phenomenon. Using 30 years of data for 20 industrialized countries, we uncover a strong and striking empirical finding: countries with close trade links tend to have more tightly correlated business cycles. It follows that countries are more likely to satisfy the criteria for entry into a currency union after taking steps towards economic integration than before.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1473.

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Date of creation: Sep 1996
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Handle: RePEc:cpr:ceprdp:1473

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Keywords: Business Cycle; Empirical; Instrumental Variables; Integration; International; Trade;

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References

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  1. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Is There a Conflict Between EC Enlargement and European Monetary Unification?," CEPR Discussion Papers 646, C.E.P.R. Discussion Papers.
  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. Eichengreen, Barry, 1987. "Real Exchange Rate Behavior Under Alternative International Monetary Regimes: Interwar Evidence," Department of Economics, Working Paper Series qt0nh766xh, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  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. Luca Antonio Ricci, 1997. "Exchange Rate Regimes and Location," IMF Working Papers 97/69, International Monetary Fund.
  6. 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.
  7. George S. Tavlas, 1993. "The ‘New’ Theory of Optimum Currency Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 663-685, November.
  8. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley.
  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. 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.
  11. Cohen, Daniel & Wyplosz, Charles, 1989. "The European Monetary Union: An Agnostic Evaluation," CEPR Discussion Papers 306, C.E.P.R. Discussion Papers.
  12. Eichengreen, B., 1992. "Should the Maastricht Treaty be Saved?," Princeton Studies in International Economics 74, International Economics Section, Departement of Economics Princeton University,.
  13. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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