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Is Europe an Optimum Currency Area?

  • Barry Eichengreen.

An optimum currency area is an economic unit composed of regions affected symmetrically by disturbances and between which labour and other factors of production flow freely. The symmetrical nature of disturbances and the high degree of factor mobility make it optimal to forsake nominal exchange rate changes as an instrument of adjustment and to reap the reduction in transactions costs associated with a common currency. This paper assesses labour mobility and the incidence of shocks in Europe by comparing them with comparable measures for Canada and the United States. Real exchange rates, a standard measure of the extent of asymmetrical disturbances, remain considerably more variable in Europe than within the United States. Real securities prices, a measure of the incentive to reallocate productive capital across regions, appear considerably more variable between Paris and Dusseldorf then between Toronto and Montreal. A variety of measures suggests that labour mobility and the speed of labour-market adjustment remain lower in Europe than in the United States. Thus, Europe remains further than the currency unions of North America from the ideal of an optimum currency area.

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Paper provided by University of California at Berkeley in its series Economics Working Papers with number 90-151.

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Date of creation: 01 Oct 1990
Date of revision:
Handle: RePEc:ucb:calbwp:90-151
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  1. Barry Eichengreen, 1989. "The Comparative Performance of Fixed and Flexible Exchange Rate Regimes : Interwar Evidence," NBER Working Papers 3097, National Bureau of Economic Research, Inc.
  2. Eleanor H. Erdevig, 1986. "Federal funds flow no bargain for Midwest," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-10.
  3. Sebastian Edwards, 1989. "Real Exchange Rates in the Developing Countries: Concepts and Measure- ment," NBER Working Papers 2950, National Bureau of Economic Research, Inc.
  4. Boltho, Andrea, 1989. "European and United States Regional Differentials: A Note," Oxford Review of Economic Policy, Oxford University Press, vol. 5(2), pages 105-15, Summer.
  5. Barry Eichengreen., 1990. "One Money for Europe? Lessons from the US Currency Union," Economics Working Papers 90-132, University of California at Berkeley.
  6. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
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