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A convergence-sensitive optimum-currency-area index



A number of authors have used the concept of an optimum currency area (or OCA) index to assess the relative proximity of various pairs of economies to the ideal of an optimum currency area. Alas, a significant deficiency of this approach as used so far is that it provides no room for long-term real income convergence - a frequently observed process that can be viewed as a specific type of long-term asymmetric shock. In this paper, a novel way to construct the OCA index is suggested that is sensitive to any real convergence (or divergence) between the two economies under study. Estimation of this convergence-sensitive OCA index for a sample of OECD economies yields an intuitively plausible result: real convergence gains on significance within the OCA index after an initial sample, a group of advanced OECD economies, is broadened with a group of emerging economies. Applied to the 2001-2008 period, the convergence-sensitive index shows a few Central and Eastern European late-transition economies to be better prepared for a common currency with Germany than several current euro area members.

Suggested Citation

  • Michal Skořepa, 2011. "A convergence-sensitive optimum-currency-area index," Working Papers IES 2011/23, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2011.
  • Handle: RePEc:fau:wpaper:wp2011_23

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    References listed on IDEAS

    1. John Beirne & Guglielmo Maria Caporale & Marianne Schulze-Ghattas & Nicola Spagnolo, 2013. "Volatility Spillovers and Contagion from Mature to Emerging Stock Markets," Review of International Economics, Wiley Blackwell, vol. 21(5), pages 1060-1075, November.
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    More about this item


    optimum currency area; OCA index; real convergence; real exchange rate; trend appreciation;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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