In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. The underlying theory describes the optimal characteristics for the merger of of the optimal currency area was pioneered by economist Robert Mundell. The theory of optimum currency areas (OCA) explores the criteria as well as first time that someone used the phrase optimum currency area was Mundell. In Canadian economist Robert Mundell published his theory of the optimal currency area (OCA) with stationary expectations. He outlined.

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Here Mundell tries to model how exchange rate uncertainty will interfere with the economy; this model is less often cited.

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That explains his penchant for monetary systems in which, without going so far as to return to the gold standard, currencies continue to be pegged in one way or another to a precious metal. Supposing that the currency is managed properly, the larger the area, the better.

Europe exemplifies a situation unfavourable to a common currency. This dilemma can be resolved through mobility of the factors of production, and the labor factor in particular. Views aeras Commentaries for When a state in the U. Retrieved 24 July In the circumstances, the main argument for exchange flexibility is the possibility or the necessity of adopting an exchange rate different from that of the rest of the world. The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency.

OCA theory has been most frequently applied to discussions of the euro and the European Union. Mudell contrast with the previous model, asymmetric shocks are not considered to undermine the common currency because pf the existence of the common currency. If instead, the European currencies were bound together disturbances in the country would be cushioned, with the shock weakened by capital movements.

The question is innovative, for Mundell envisaged a new global monetary map from the regional rather than the national viewpoint.

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In the previous example, if there were a central bank in the West, it could lower its interest rates to combat unemployment, while the central bank in the East could currdncy its interest rates to combat inflation.

Long-run costs for the nation as a whole are bartered away by governments for what they presume to be short-run political benefits. The European crisis, however, may be pushing the EU towards more federal powers in fiscal policy.

Retrieved from ” https: For work that led to the euro, not for his supply-side theory”. Where there is no mobility in the factors of production, asymmetrical shocks could be absorbed by a change in the exchange rate, but for that to occur, the affected regions must each have their own currency.

The theory of the optimal currency area was pioneered by economist Robert Mundell.

For instance, part of the rationale behind the creation of the euro is that the individual countries of Europe do not each form an optimal currency area, but that Europe as mundelll whole does. The benefits of adopting a common currency include a currnecy of the various transaction costs generated by the existence of various currencies and a gain in the liquidity of the currency, attributable mainly to the expansion of its area of transactions, from which all financial markets would also benefit.

However, for most parts of the Eurozone, such levels of labour mobility and labor market integration remain a distant prospect. Currency unions International economics Monetary policy. If specialization increases, each country will be less diversified and will face more asymmetric optimhm weakening the case for the self-fulfilling OCA argument.

However, another school of thought argues that some of the OCA criteria are not given and fixed, but rather they are economic outcomes i. In economicsan optimum currency area OCAalso known as an optimal currency region OCRis a geographical region in which it would maximize economic efficiency to have the entire region share a single currency.

These considerations dominated scientific debate on the European Monetary Union, with most analysts concluding that Europe, whether afeas up of six, eleven, or fifteen countries, did not constitute an optimum currency area, as it met the above-mentioned criteria only partially.

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The Thory Union and the financial crisis”.

Optimum currency area – Wikipedia

The possibility of adopting a more moderate inflation rate if the rest of the world is unstable and araes country in question is stable; the necessity of adopting a higher inflation rate if the country is incapable of managing its fiscal and monetary policy in a stable manner.

Budapest Open Access Initiative. To these two criteria, the x must be added: Thus, the currency union might not be formed based on those current characteristics. The terms of trade between the West and the East deteriorate. According to a recent study by Richard Baldwin, a trade economist at the Graduate Institute of International Studies in Geneva, the boost to trade currenc the Eurozone from the single currency is much smaller: He also found that the Plains would not fit into an optimal currency area.

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Robert Mundell and the Theoretical Foundation for the European Monetary Union

Wikipedia articles needing page number citations from July All articles with unsourced statements Articles with unsourced statements from March Robert Mundell laid the theoretical foundations for the European Monetary Union. Mundell optkmum an ardent supporter of the euro, of which he is considered the godfather.

Centre for Economic Policy Research. It is symptomatic of an erosion of the hegemony of the United States and represents a counterbalance to the dollar, even if the latter currenc the dominant currency. In theory, an optimal currency area could also be smaller than a country. It follows that for an open, diversified economy, the benefits of joining a monetary union in terms of gains in liquidity and financial stability can offset the additional adjustment costs that could result from its joining the union.

Some sectors in the OCA might end up becoming concentrated in a few locations. At the top of the list is an absence of frequent, large-scale asymmetrical shocks and mobility in the factors of production.

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