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Ever Closer to Heaven? An Optimum-Currency-Area Index for European Countries

  • Tamim Bayoumi and Barry Eichengreen.

In this paper we develop a procedure for applying the core implications of the theory of optimum currency areas to cross-country data. We demonstrate that these implications find strong empirical support. The relationship between the characteristics of countries to which OCA theory points and the observed behavior of exchange rates seems sufficiently stable and robust to support simple forecasting. Extrapolating the independent variables, we therefore use our exchange rate equations to predict which countries will be best able to support stable exchange rates in the future -- equivalently, which are likely to be best prepared to be among the founding members of Europe's monetary union.

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Paper provided by University of California at Berkeley in its series Center for International and Development Economics Research (CIDER) Working Papers with number C96-078.

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Date of creation: 01 Dec 1996
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Handle: RePEc:ucb:calbcd:c96-078
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Web page: http://www.haas.berkeley.edu/groups/iber/wps/ciderwp.htmEmail:


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  1. Paul Grauwe, 1996. "The economics of convergence: Towards monetary union in Europe," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(1), pages 1-27, March.
  2. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
  3. Tamim Bayoumi, 1994. "A Formal Model of Optimum Currency Areas," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 537-554, December.
  4. Smaghi, L.B. & Area, C., 1993. "Rating the EC as an Optimal Currency Area," Papers 187, Banca Italia - Servizio di Studi.
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