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Microeconomic foundations of an optimal currency area

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  • James L Swofford

Abstract

The concept of an optimum currency area has previously been developed using macroeconomic policy results and factor mobility as the criteria for the optimum extent of a common currency area. In this paper, microeconomic foundations for an optimum currency area are set forth. These microeconomic foundations are requirements for a common currency area to exist. One can test for consistency with these microeconomic foundations. Procedures for such tests are discussed. Some preliminary results are presented from tests of whether or not the Euro Area economies constitute a common currency area. The test results tentatively suggest that the Euro Area countries may encounter problems in their attempt to establish a common currency.

Suggested Citation

  • James L Swofford, 2000. "Microeconomic foundations of an optimal currency area," Review of Financial Economics, John Wiley & Sons, vol. 9(2), pages 121-128, December.
    • Handle: RePEc:wly:revfec:v:9:y:2000:i:2:p:121-128
    DOI: 10.1016/S1058-3300(00)00020-3
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    1. Jane M. Binner & Sajid M. Chaudhry & Andrew W. Mullineux & James L. Swofford, 2018. "Scotland as an optimal currency area," Scottish Journal of Political Economy, Scottish Economic Society, vol. 65(4), pages 315-327, September.
    2. Barnett, William A., 2003. "Aggregation-theoretic monetary aggregation over the euro area, when countries are heterogeneous," Working Paper Series 260, European Central Bank.
    3. Affuso, Ermanno & Buleca, Jan & Zhang, Dengjun & Zoricak, Martin, 2023. "The welfare impact of Euro on European consumers," Finance Research Letters, Elsevier, vol. 56(C).

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