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An optimum-currency-area odyssey

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  • Dellas, Harris
  • Tavlas, George S.

Abstract

The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by (Mundell, 1961) and (McKinnon, 1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally-tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum-currency-area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman's work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell's classic formulation of an optimal currency area was aimed, in part, at refuting Friedman's "strong" case for floating exchange rates; and Friedman's work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country's characteristics can be used to determine its optimal exchange-rate regime.

Suggested Citation

  • Dellas, Harris & Tavlas, George S., 2009. "An optimum-currency-area odyssey," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1117-1137, November.
  • Handle: RePEc:eee:jimfin:v:28:y:2009:i:7:p:1117-1137
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    Keywords

    Optimum-currency-areas Exchange-rate regimes New Keynesian models;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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