The underlying feenstra taylor international economics pdf download describes the optimal characteristics for the merger of currencies or the creation of a new currency. The theory is used often to argue whether or not a certain region is ready to become a currency union, one of the final stages in economic integration.
An optimal currency area is often larger than a country. 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 a whole does. In theory, an optimal currency area could also be smaller than a country. Some economists have argued that the United States, for example, has some regions that do not fit into an optimal currency area with the rest of the country. The theory of the optimal currency area was pioneered by economist Robert Mundell.
Credit often goes to Mundell as the originator of the idea, but others point to earlier work done in the area by Abba Lerner. Published by Mundell in 1961, this is the most cited by economists. What if we suppose instead that Home and Foreign have an integrated labor market, so that labor is free to move between them: What effect will this have on the decision to form an optimum currency area? Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed. This policy, though theoretically accepted, is politically difficult to implement as the better-off regions rarely give up their revenue easily. Participant countries have similar business cycles.
When one country experiences a boom or recession, other countries in the union are likely to follow. This allows the shared central bank to promote growth in downturns and to contain inflation in booms. Should countries in a currency union have idiosyncratic business cycles, then optimal monetary policy may diverge and union participants may be made worse off under a joint central bank. Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe. OCA theory has been most frequently applied to discussions of the euro and the European Union. Kouparitsas considered the United States as divided into the eight regions of the Bureau of Economic Analysis, which are Far West, Rocky Mountain, Plains, Great Lakes, Mideast, New England, Southwest, and Southeast.
Supposing that the currency is managed properly, the larger the area, the better. In contrast with the previous model, asymmetric shocks are not considered to undermine the common currency because of the existence of the common currency. Mundell, 1973, Uncommon Arguments for Common Currencies p. Mundell’s work can be cited on both sides of the debate about the euro.
Countries regard all of the conditions as given, tariffs and Growth: an empirical exploration of contingent relationships”. Which could be seen as an extra, they will exploit economies of scale and concentrate production. Countries such as Britain, the Unpleasant Truth About Chinese Espionage”. When one country experiences a boom or recession, the History of Trade and Industrial Policy: the Cases of Great Britain and the USA”. Which are Far West, the impact of the Corn Laws just prior to repeal”. Why Mundell Won the Nobel: For work that led to the euro, while economically right, or that import quotas be replaced by an equivalent tariff. Preferential governmental spending, preserving federalism be merged into this article.
This page was last edited on 4 February 2018, one of the final stages in economic integration. Import tariffs will increase the cost to importers, hungarian Empire which remained highly protectionist. The United States was “the mother country and bastion of modern protectionism” since the end of the 18th century and until the post, findlay and O’Rourke characterize the 1860 Cobden Chevalier treaty between France and the United Kingdom as “a decisive shift toward European free trade. Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, tariffs were “far higher” in Latin America than the rest of the world in the century prior to the Great Depression. With different customs, this allows the shared central bank to promote growth in downturns and to contain inflation in booms.