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Is Europe an Optimum Currency Area?

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  • Bofinger, Peter

Abstract

The debate on EMU has been very influenced by the traditional theory of optimum currency areas (OCAs). The paper shows that this theory is not an ideal yardstick for an assessment of EMU. Its assumptions are not very realistic and its focus on asymmetric real shocks is much too narrow. In addition, observed past real exchange rate changes are not a good predictor of future real shocks in the European Union (EU). In general, the OCA approach is heavily biased towards very small currency areas. Because of these shortcomings the paper develops a monetary approach to the theory of OCAs. In this concept the choice between a monetary union and independent national currency areas is analysed from the perspective of monetary policy efficiency. It can be shown that EMU is superior to national currency areas in terms of credibility, the response to asymmetric monetary shocks and the effectiveness of monetary targets and instruments.

Suggested Citation

  • Bofinger, Peter, 1994. "Is Europe an Optimum Currency Area?," CEPR Discussion Papers 915, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:915
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    Citations

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    Cited by:

    1. Carsten Hefeker, 1995. "Monetary union or currency competition? Currency arrangements for monetary stability in East and West," Constitutional Political Economy, Springer, vol. 6(1), pages 57-69, December.
    2. Ricci, Luca Antonio, 2008. "A Model of an Optimum Currency Area," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-31.
    3. Kenen, Peter B., 2000. "Currency areas, policy domains, and the institutionalization of fixed exchange rates," LSE Research Online Documents on Economics 20170, London School of Economics and Political Science, LSE Library.
    4. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Econ micas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    5. Henk Kranendonk & Johan Verbruggen, 2005. "How to determine the contributions of domestic demand and exports to economic growth?," CPB Memorandum 129.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Ricci, Luca Antonio, 1995. "Exchange rate regimes and location," Discussion Papers, Series II 291, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    7. Weimann, Marco, 2002. "OCA theory and EMU eastern enlargement: An empirical application," Dresden Discussion Paper Series in Economics 07/02, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    8. Helmut Kramer, 1998. "Aspects of European Economic and Monetary Union," Austrian Economic Quarterly, WIFO, vol. 3(3), pages 131-136, July.
    9. Hans Grüner & Carsten Hefeker, 1996. "Bank cooperation and banking policy in a monetary union: A political-economy perspective on EMU," Open Economies Review, Springer, vol. 7(3), pages 183-198, July.
    10. repec:onb:oenbwp:y::i:23:b:1 is not listed on IDEAS
    11. Franz Pauer, 1996. "Will Asymmetric Shocks Pose a Serious Problem in EMU?," Working Papers 23, Oesterreichische Nationalbank (Austrian Central Bank).
    12. Horvath, Julius & Ratfai, Attila, 2004. "Supply and demand shocks in accession countries to the Economic and Monetary Union," Journal of Comparative Economics, Elsevier, vol. 32(2), pages 202-211, June.
    13. Jean Pisani-Ferry, 1994. "Union monétaire et convergence : qu'avons nous appris ?," Working Papers 1994-14, CEPII research center.
    14. Tal Sadeh, 2006. "Adjusting to the EMU," European Union Politics, , vol. 7(3), pages 347-372, September.
    15. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Económicas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    16. Horvath, Julius, 2003. "Optimum currency area theory: A selective review," BOFIT Discussion Papers 15/2003, Bank of Finland Institute for Emerging Economies (BOFIT).
    17. Andrew Dickerson & Heather Gibson & Euclid Tsakalotos, 1998. "Business Cycle Correspondence in the European Union," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 25(1), pages 49-75, January.
    18. H.P. Grãœner & C. Hefeker, 1995. "Domestic pressures and the exchange rate regime: why economically bad decisions are politically popular?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 48(194), pages 331-350.
    19. Eleni Roussou & Norman Cameron, 2005. "The Impact of the European Economic & Monetary Union on the Stability of the Greek Economy," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 85-98.
    20. Stefan Boeters, 2009. "Optimal tax progressivity in unionised labour markets; what are the driving forces?," CPB Discussion Paper 129.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    21. Luca Antonio Ricci, 1997. "Un modèle simple de zone monétaire optimale," Économie et Prévision, Programme National Persée, vol. 128(2), pages 1-19.
    22. Hefeker, Carsten, 1995. "The political choice and collapse of fixed exchange rates," Discussion Papers, Series II 277, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".

    More about this item

    Keywords

    European Monetary Integration; European Monetary Union; Optimum Currency Areas;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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