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An Optimum-Currency-Area Odyssey

  • Harris Dellas

    (University of Bern)

  • George S.Tavlas

    ()

    (Bank of Greece)

The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by Mundell (1961), McKinnon (1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally- tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum currency- area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman’s work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell’s classic formulation of an optimal currency area was aimed, in part, at refuting Friedman’s ‘‘strong’’ case for floating exchange rates; and Friedman’s work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country’s characteristics can be used to determine its optimal exchange-rate regime

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Paper provided by Bank of Greece in its series Working Papers with number 102.

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Length: 46 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:bog:wpaper:102
Contact details of provider: Web page: http://www.bankofgreece.gr

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