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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. Sebastian Edwards, 1989. "Real Exchange Rates in the Developing Countries: Concepts and Measure- ment," NBER Working Papers 2950, National Bureau of Economic Research, Inc.
    2. 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.
    3. 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.
    4. Eleanor H. Erdevig, 1986. "Federal funds flow no bargain for Midwest," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 10(Jan), pages 3-10.
    5. Boltho, Andrea, 1989. "European and United States Regional Differentials: A Note," Oxford Review of Economic Policy, Oxford University Press, vol. 5(2), pages 105-115, Summer.
    6. 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.
    7. Eichengreen, Barry, 1989. "The Comparative Performance of Fixed Flexible Exchange Rate Regimes: Interwar Evidence," Department of Economics, Working Paper Series qt2kn4z93w, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    8. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
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