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The equilibrium approach to optimum currency areas

  • Filippo Cesarano


    (Banca d'Italia, Ufficio Ricerche Storiche, Roma (ItaIY))

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    This paper contrasts the received view of optimum currency areas with the modernequilibrium approach. Setting Mundell's work against earlier analyses of monetary unions exposes the peculiarities of his theory, embedded in the static Keynesian paradigm. Mundell's hypothesis, constructed on the assumption of interregional factor immobility with regions spanning the country borders, leads to exogenous optimality criteria, which characterized the research program of the following decades (section 1). From the late 1990s, however, several papers emphasized the endogeneity ofoptimum currency area criteria on the basis of the new classical macroeconomics, overturning the traditional approach. Highlighting the implications of the Lucas critique, these contributions point at an alternative view of optimality, bringing the subject again into the realm of equilibrium theory (section 2).

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    Article provided by Banca Nazionale del Lavoro in its journal BNL Quarterly Review.

    Volume (Year): 59 (2006)
    Issue (Month): 237 ()
    Pages: 193-209

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    Handle: RePEc:psl:bnlaqr:2006:23
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    1. repec:cto:journl:v:24:y:2004:i:1-2:p:163-170 is not listed on IDEAS
    2. Gil-Pareja, Salvador, 2003. "Pricing to market behaviour in European car markets," European Economic Review, Elsevier, vol. 47(6), pages 945-962, December.
    3. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
    4. Paul de Grauwe & Francesco Paolo Mongelli, 2005. "Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together?," Working Papers de Economia (Economics Working Papers) 29, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    5. Cesarano, Filippo, 1985. "On the viability of monetary unions," Journal of International Economics, Elsevier, vol. 19(3-4), pages 367-374, November.
    6. Alberto Alesina & Robert J. Barro, 2000. "Currency Unions," NBER Working Papers 7927, National Bureau of Economic Research, Inc.
    7. Fatas, Antonio, 1997. "EMU: Countries or regions? Lessons from the EMS experience," European Economic Review, Elsevier, vol. 41(3-5), pages 743-751, April.
    8. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
    9. Silvana Tenreyro & Robert J. Barro, 2003. "Economic Effects of Currency Unions," NBER Working Papers 9435, National Bureau of Economic Research, Inc.
    10. Mundell, Robert A., 1999. "A Reconsideration of the Twentieth Century," Nobel Prize in Economics documents 1999-5, Nobel Prize Committee.
    11. Frankel, Jeffrey & Rose, Andrew K., 2001. "An Estimate of the Effect of Common Currencies on Trade and Income," Working Paper Series rwp01-013, Harvard University, John F. Kennedy School of Government.
    12. Filippo Cesarano, 1997. "Currency Areas and Equilibrium," Open Economies Review, Springer, vol. 8(1), pages 51-59, January.
    13. Krugman, P., 1993. "What Do We Need to Know About the International Monetary System?," Princeton Studies in International Economics 190, International Economics Section, Departement of Economics Princeton University,.
    14. Filippo Cesarano, 2006. "The Origins of the Theory of Optimum Currency Areas," History of Political Economy, Duke University Press, vol. 38(4), pages 711-731, Winter.
    15. R. A. Mundell, 2000. "Erratum: A Reconsideration of the Twentieth Century," American Economic Review, American Economic Association, vol. 90(5), pages 1535-1535, December.
    16. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
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