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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 labour 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 labour 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 asymmetrical 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 then between Toronto and Montreal. A variety of measures suggests that labour mobility and the speed of labour-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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 478.

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Date of creation: Nov 1990
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Handle: RePEc:cpr:ceprdp:478

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Keywords: Exchange rates; Factor Mobility; Optimal Currency Area; Real Exchange Rates; Shocks;

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  1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  2. 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.
  3. Eleanor H. Erdevig, 1986. "Federal funds flow no bargain for Midwest," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-10.
  4. Sebastian Edwards, 1989. "Real Exchange Rates in the Developing Countries: Concepts and Measure- ment," NBER Working Papers 2950, National Bureau of Economic Research, Inc.
  5. 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.
  6. Barry Eichengreen, 1989. "The Comparative Performance of Fixed and Flexible Exchange Rate Regimes : Interwar Evidence," NBER Working Papers 3097, National Bureau of Economic Research, Inc.
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