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Theory of Optimum Currency Areas

In: Monetary Integration in Europe

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  • Horst Tomann

    (Freie Universitaet (FU) Berlin)

Abstract

The economic rationale of a currency union, compared to other monetary regimes, is that governments are required to tie their hands: money cannot be used as a policy instrument at a government’s discretion. However, governments also part with exchange rate policies when joining a currency union. A repegging of the exchange rate seems to be an effective measure to compensate for asymmetric shocks. Chapter 2 takes a closer look at the value of exchange rate policy and elaborates two arguments. Firstly, exchange rate policies do help against monetary shocks but not against real ones. Secondly, the flexibility of prices and wages will increase within a monetary union.

Suggested Citation

  • Horst Tomann, 2017. "Theory of Optimum Currency Areas," Studies in Economic Transition, in: Monetary Integration in Europe, edition 2, chapter 2, pages 21-35, Palgrave Macmillan.
    • Handle: RePEc:pal:stuchp:978-3-319-59247-3_2
    DOI: 10.1007/978-3-319-59247-3_2
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