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OCA cubed: Mundell in 3D

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Abstract

This paper intends to fill two gaps in the Optimal Currency Area literature. First of all, Mundell's original idea has very little formalmodel theoretical underpinning. Second, it almost exclusively views countries contemplating monetary unification as single economies. We question this view and expand the model to incorporate the division of an economy into three sectors. In the empirical part of the paper, we follow recent OCA empirici literature and investigate the correlation of shocks between the individual new EU member countries and the `EU-core'. Treating the whole economy as one sector this is a standard exercise. However, since the three-sector version of our model provides a natural metric on which to assess the appropriateness of unification, we are able to repeat the exercise treating each country's economy as a collection of three distinct sectors.

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Bibliographic Info

Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2009/24.

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Length: 28 pages
Date of creation: Oct 2009
Date of revision: Oct 2009
Handle: RePEc:fau:wpaper:wp2009_24

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Keywords: OCA; supply and demand shocks; VAR decomposition; new EU member states;

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