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Is Europe an Optimum Currency Area?

In: The European Community after 1992

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  • Barry Eichengreen

    (University of California at Berkeley)

Abstract

An optimum currency area (OCA) is an economic unit composed of regions affected symmetrically by disturbances and between which labour and other factors of production flow freely (Mundell, 1961). Insofar as regions within the OCA experience the same shocks, there is no obvious advantage to altering relative prices between them. Insofar as localized concentrations of unemployment nonetheless remain, the free mobility of labour from high- to low-unemployment regions can eliminate the problem. It is hence optimal to dispense with one of the principal instruments — changes in the exchange rate — traditionally used to effect relative price adjustments, and to reap the benefits, in terms of convenience and efficiency, of a common currency.

Suggested Citation

  • Barry Eichengreen, 1992. "Is Europe an Optimum Currency Area?," Palgrave Macmillan Books, in: Silvio Borner & Herbert Grubel (ed.), The European Community after 1992, chapter 8, pages 138-161, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-12048-2_8
    DOI: 10.1007/978-1-349-12048-2_8
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    References listed on IDEAS

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    1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
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    4. Eichengreen, Barry, 1989. "The Comparative Performance of Fixed and Flexible Exchange Rate Regimes: Interwar Evidence," CEPR Discussion Papers 349, C.E.P.R. Discussion Papers.
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    8. Eichengreen, Barry, 1990. "One Money for Europe? Lessons from the US Currency Union," Department of Economics, Working Paper Series qt6ks1k831, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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