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Optimum Currency Area Theory : An Approach For Thinking About Monetary Integration

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Author Info

  • Horvath, Roman

    (Central European University and Charles University,)

  • Komárek, Luboš

    (The Czech National Bank, Prague and University of Economics, Prague)

Abstract

The optimum currency area (OCA) theory tries to answer an almost prohibitively difficult question : what is the optimal number of currencies to be used in one region. The difficulty of the question leads to a low operational precision of OCA theory. Therefore, we argue that the OCA theory is a framework for discussion about monetary integration. We summarize theoretical issues from the classical contributions to the OCA literature in the 1960s to the modern “endogenous view”. A short survey of empirical studies on the OCA theory in the connection with the EMU and the Czech Republic is presented. Finally, we calculate OCA-indexes for the Czech Republic, EU, Germany and Portugal. The index predicts exchange rates variability from the view of traditional OCA criteria and asseses benefit-cost ratio of implementing common currency for a pair of the countries. We compare the structural similarity of the Czech Republic and Portugal to the German economy and find that the Czech economy is closer. The results are reversed when the EU economy is considered as a benchmark country.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 647.

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Length: 30 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:wrk:warwec:647

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Keywords: Optimum currency area theory ; central banking ; transition; European Union JEL Classification: E32 ; F42 ; E42 ; F33;

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References

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  1. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers, C.E.P.R. Discussion Papers 643, C.E.P.R. Discussion Papers.
  2. Bayoumi, Tamim & Eichengreen, Barry, 1996. "Operationalizing the Theory of Optimum Currency Areas," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1484, C.E.P.R. Discussion Papers.
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Cited by:
  1. Krzysztof Beck, 2013. "Determinants of Business Cycles Synchronization in the European Union and the Euro Area," Equilibrium, Uniwersytet Mikolaja Kopernika, vol. 8, pages 25-48.
  2. Julius Horvath, 2004. "Optimum currency area theory: A selective review," Macroeconomics, EconWPA 0401014, EconWPA.
  3. Jan Babetskii, 2004. "L’adhésion des Peco (Pays d’Europe Centrale et Orientale) à l'Union européenne et l'endogénéité des chocs d'offre et de demande," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 163(2), pages 33-49.

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