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Mundell, the Euro, and Optimum Currency Areas

  • Ronald McKinnon

May 2000 Robert Mundell seems to be on both sides of the debate over European monetary unification and on the adoption of common monetary standards in other parts of the world. But this paradox can be resolved by noting that there are two Mundell models-earlier and later. From his theory of optimum currency areas published in 1961, Mundell seemed to be arguing in favor of making currency areas fairly small, as defined by the domain of labor mobility, so as to better offset asymmetric shocks, i.e., those affecting one area differently from another. However, in two important papers written in 1970, but not published until 1973 in an obscure conference volume, Mundell presents a different, and surprisingly modern, analytical perspective. If a common money can be managed so that its general purchasing power remains stable, then the larger the currency area-even one encompassing diverse regions or nations subject to asymmetric shocks-the better.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 00009.

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Date of creation: May 2000
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Handle: RePEc:wop:stanec:00009
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  1. Ronald I. McKinnon, 1996. "The Rules of the Game: International Money and Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133180, June.
  2. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-57, September.
  3. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
  4. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, June.
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