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On Optimal Currency Areas: Common Shocks Versus Common Persistence of Shocks

Author

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  • Louisa Grimm
  • Sven Steinkamp
  • Frank Westermann

Abstract

The Optimal Currency Area (OCA) literature has been focusing on the co‐movement of business cycle shocks as a key policy criterion. We document in a simple Barro–Gordon framework that, in addition to a high correlation of shocks, a common persistence of shocks is a relevant OCA criterion. The model provides a conceptual underpinning for empirical studies that have used the Serial Correlation Common Features (SCCF) test to evaluate common currency areas. We apply the SCCF test to a set of countries that could potentially introduce the Euro and find for the period from 1999 (Q1) to 2019 (Q3) only little evidence that the acceding countries share a common cyclical response pattern with the European Monetary Union (EMU) aggregate.

Suggested Citation

  • Louisa Grimm & Sven Steinkamp & Frank Westermann, 2025. "On Optimal Currency Areas: Common Shocks Versus Common Persistence of Shocks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 3825-3837, October.
    • Handle: RePEc:wly:ijfiec:v:30:y:2025:i:4:p:3825-3837
    DOI: 10.1002/ijfe.3093
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    References listed on IDEAS

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