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An Optimum Currency Area Odyssey

  • Dellas, Harris
  • Tavlas, George

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7645.

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Date of creation: Jan 2010
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Handle: RePEc:cpr:ceprdp:7645
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  1. Harris Dellas & George Tavlas, 2005. "Wage Rigidity and Monetary Union," Economic Journal, Royal Economic Society, vol. 115(506), pages 907-927, October.
  2. Evi Pappa, 2004. "Do the ECB and the Fed really need to cooperate? Optimal monetary policy in a two-country world," LSE Research Online Documents on Economics 512, London School of Economics and Political Science, LSE Library.
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  5. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
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  13. Robert Kollmann, 2002. "Monetary policy rules in the open economy: effects of welfare and business cycles," ULB Institutional Repository 2013/7628, ULB -- Universite Libre de Bruxelles.
  14. Frederick Guy & Neil Perry & Andrei Shleifer & Andrew Metrick & Martin L. Weitzman & Barbara R. Bergmann & David Laidler & George S. Tavlas, 1999. "Correspondence," Journal of Economic Perspectives, American Economic Association, vol. 13(3), pages 235-242, Summer.
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  19. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
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  22. Mongelli, Francesco Paolo, 2002. ""New" views on the optimum currency area theory: what is EMU telling us?," Working Paper Series 0138, European Central Bank.
  23. Tavlas, George & Dellas, Harris & Stockman, Alan C., 2008. "The classification and performance of alternative exchange-rate systems," European Economic Review, Elsevier, vol. 52(6), pages 941-963, August.
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  26. Friedman, Milton, 1969. "Round Table on Exchange Rate Policy," American Economic Review, American Economic Association, vol. 59(2), pages 364-66, May.
  27. Kenen,Peter B. & Meade,Ellen E., 2008. "Regional Monetary Integration," Cambridge Books, Cambridge University Press, number 9780521862509.
  28. Filippo Cesarano, 2006. "The Origins of the Theory of Optimum Currency Areas," History of Political Economy, Duke University Press, vol. 38(4), pages 711-731, Winter.
  29. George S. Tavlas, 1993. "The ‘New’ Theory of Optimum Currency Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 663-685, November.
  30. Francesco Paolo Mongelli, 2005. "What is European Economic and Monetary Union Telling us About the Properties of Optimum Currency Areas?," Journal of Common Market Studies, Wiley Blackwell, vol. 43(3), pages 607-635, 09.
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  32. Charles Engel & John H. Rogers, 2004. "European product market integration after the euro," Economic Policy, CEPR;CES;MSH, vol. 19(39), pages 347-384, 07.
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