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Optimum Currency Areas, Real and Nominal Convergence in the European Union

Author

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  • João Sousa Andrade

    (Faculty of Economics and GEMF, University of Coimbra, Portugal)

  • António Portugal Duarte

    (Faculty of Economics and GEMF, University of Coimbra, Portugal)

Abstract

It is well known and widely accepted by economists that the characteristics of the countries of the European Monetary Union (EMU) created in 1999 did not match the requirements of an Optimum Currency nominal. A strict level of convergence in inflation andArea (OCA). The only criteria for membership of the EMU were interest rates was imposed. In addition to the nominal convergence,a process of convergence of nominal and real incomes in the new monetary area was expected to be generated with the monetary integration. After summarizing the criteria for a successful currency area in the context of the OCA theory, we study the real and nominal convergence process for an older group of countries (11) to establish whether or not these countries satisfy the conditions of an OCA. We apply ADF tests, together with the Schmidt-Phillips tests, and we estimate the fractional differential process to overcome the disadvantages of the traditional tests, to test for nominal and real convergence. We conclude that a process of real divergence and nominal convergence does exist, and suggest this is a source of genuine imbalance in the European integration process that can destroy the harmonious development of the European Monetary Union.

Suggested Citation

  • João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Económicas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    • Handle: RePEc:gmf:journl:y:2015:i:42:p:8-29
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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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