A convergence-sensitive optimum-currency-area index
AbstractA number of authors have used the concept of an optimum currency area (or OCA) index to assess the relative proximity of various pairs of economies to the ideal of an optimum currency area. Alas, a significant deficiency of this approach as used so far is that it provides no room for long-term real income convergence - a frequently observed process that can be viewed as a specific type of long-term asymmetric shock. In this paper, a novel way to construct the OCA index is suggested that is sensitive to any real convergence (or divergence) between the two economies under study. Estimation of this convergence-sensitive OCA index for a sample of OECD economies yields an intuitively plausible result: real convergence gains on significance within the OCA index after an initial sample, a group of advanced OECD economies, is broadened with a group of emerging economies. Applied to the 2001-2008 period, the convergence-sensitive index shows a few Central and Eastern European late-transition economies to be better prepared for a common currency with Germany than several current euro area members.
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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2011/23.
Date of creation: Jul 2011
Date of revision: Jul 2011
optimum currency area; OCA index; real convergence; real exchange rate; trend appreciation;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F15 - International Economics - - Trade - - - Economic Integration
- F31 - International Economics - - International Finance - - - Foreign Exchange
- O2 - Economic Development, Technological Change, and Growth - - Development Planning and Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-21 (All new papers)
- NEP-CBA-2011-07-21 (Central Banking)
- NEP-MON-2011-07-21 (Monetary Economics)
- NEP-OPM-2011-07-21 (Open Economy Macroeconomic)
- NEP-TRA-2011-07-21 (Transition Economics)
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