A plan for a european currency in a plan for a european currency, a 1969 unpublished paper recently rediscovered, robert mundell outlines his vision for a european currency. Mundell warned the reader not to regard the exercise as purely academic. Mundells classic formulation of an optimal currency area was aimed, in. European economic and monetary integration, and the optimum. We develop a simple model to analyse the nature of risksharing benefits of a single currency area for emerging market economies, based on mundell s hypothesis. The first is the pioneering phase from the early 1960s to the early 1970s. Since theory has low operational precision and oca criteria are.
Mundell global risk annual lecture as part of the global risk series with his careful analysis of optimum currency area oca theory and its application in the eurozone, professor vitor constancio, former vice president of the european central bank 20102018, pays. Robert mundell and the theoretical foundation for the. Optimum currency area, a currency area in which the benefits of using a common currency outweigh the costs of individual economies giving up their own currencies. The theory of optimumcurrencyareas was conceived and developed in three highly influential. Mundell it is patently obvious that periodic balanceofpayments crises will remain an integral feature of the international economic system as long as fixed exchange rates and rigid wage and price levels prevent the international price system from fulfilling a natural role in the adjustment process. The motivation for this paper arises from the fact that there are many studies that make references to the oca theory, providing various insights for it. Aug 28, 2014 for the love of physics walter lewin may 16, 2011 duration. 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. This paper exists in english only and can be downloaded from the website. Revenge of the optimum currency area the new york times. American economic association a theory of optimum currency areas authors.
A theory of optimum currency areas mundell pdf 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. According to the oca theory, a country that considers membership in a currency union has to balance the. The theory of optimum currency areas pioneered by mundell was further complemented by mckinnon and again by kenen. This approach can help us to identify and possibly to estimate costs and benefits of adopting a common currency. Mundell i and stationary expectations like most macroeconomists in the postwar period who had a keynesian mind set, mundell in 1961 believed that national monetary and fiscal policies could successfully manipulate aggregate demand to offset privatesector shocks on.
The geographic area in which a single currency would create the greatest economic benefit. Optimum currency areas the works of robert mundell. View enhanced pdf access article on wiley online library html view download pdf for offline viewing. Although the basic tenets of the theory were anticipated during the late 1940s and the 1950s, the theory was developed and maturated in three highly influential papers of mundell 1961, mckinnon 1963 and kenen 1969. Mundell, the euro, and optimum currency areas by ronald mckinnon1 robert mundell was recently awarded the 1999 nobel prize in economics for pathbreaking theoretical contributions published in the 1960s on the ways monetary and fiscal policies work in open economies. Mundell s analysis was shortly afterwards elaborated on by mckinnon 1963, and by kenen 1969, since when optimum currency area oca theory was developed by a growing number of studies, both theoretical and empirical. May 07, 2015 soyisile dlulane 201127781 5 chapter 1. Supposing that the currency is managed properly, the larger the area, the better. The optimum currency area theory and the euro robert a. Here mundell tries to model how exchange rate uncertainty will interfere with the economy.
This paper surveys the literature on the optimum currency area oca theory. According to the nobel prize committee, he got the honor for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas. Mundell 1973 discussing the role of financial integration, in the form of cross country asset. Mundell concluded in that lecture that the international monetary system depends only on the power configuration of the countries that make it up. The oca theory serves as an approach for thinking about monetary integration and provides an explanation for the recent monetary integration processes in europe. In his 1961 article on optimum currency areas, mundell radically reformulated the problem of different exchange rate systems, by posing a new and fundamental question. Does x possess such characteristics that allow it to.
Over the years, due to developments in macroeconomic theory, the theory of optimum currency areas has been extended and modified. An important prerequisite for the risksharing benefits of a single currency is that there be limited trade among countries in national currency denominated bonds. The optimum currency area theory and the emu intereconomics. While traditionally each country has maintained its own separate, national. Despite the apparent success of emu, many writers familiar with the east asian scene think. Mundells 1961 seminal paper a theory of optimum currency areas. The theory of optimum currency areas pioneered by mundell was further.
In what follows, a precise account of the various contributions towards the theory is presented. The external shocks emphasised by the standard optimum currency area approach i. President kennedy reminded his fellow countrymen that it is the strength of the us dollar, bolstered by the strength of the us economy, not the us military arsenal, which. More than ten years after the creation of the common currency area, the eurozone. In its simplest form, as mundell describes it, an optimal currency area is a region, or area, where the benefits of sharing a common currency outweigh the costs. The disadvantages of a single currency come from loss of fl exibility.
Optimum currency area with international risk sharing. This article aims at providing an eclectic analysis of the theory of optimum currency areas ocas. While there are always economic benefits from having a single currency, through savings on the transactions costs of currency exchanges, hedging, and so on, there can be offsetting costs if a single currency stands in the way of economic adjustments that may be initiated or assisted by monetary policy. The start of the oca theory are the seminal contributions by mundell 1961. Jun 24, 2012 the creation of the euro involved, in effect, a decision to ignore everything economists had said about optimum currency areas. The theory of optimum currency areas and european monetary.
The mundellian question is traditionally framed in two ways. Mundell s 1961 seminal paper a theory of optimum currency areas. Certain parts of the world are undergoing processes of economic integration and disintegration, new experiments are being made, and a conception of what constitutes an optimum currency area can clarify the meaning of these experiments 33 pp. Jan 06, 2012 for all those interested in optimum currency areas my new infoposter economics is now available. Monetary union emu and the optimum currency area oca theory. But this paradox can be resolved by noting that there are two mundell modelsearlier and later. Under what circumstances is it advantageous for a number of regions to relinquish their monetary sovereignty in favor of a common currency. The achievement of this phase was to put forward the oca properties, start.
Contributions by mundell 1961, mckinnon 1963, and kenen 1969 laid the foundations for all subsequent work in the area of the theory of optimum currency areas. This paper aims at providing an eclectic analysis of the theory of optimum currency areas oca. This pdf is a selection from a published volume from the. Theory of optimum currency areas the theory of optimum currency areas argues that the optimal area for a system of fixed exchange rates, or a common currency, is one that is highly economically integrated. On the one hand, optimum currency areas would, in any case, almost never fit into the confines of a state or a collection of existing states. Risk sharing and the theory of optimal currency areas. 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. Its not just that a currency area is limited to a onesize fi ts all monetary policy. Unfortunately, it turned out that optimum currency area theory was essentially right, erring only in understating the problems with a shared currency.
Pdf the theory of optimum currency areas researchgate. A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries. A single currency is more suitable for some areas of the world than for others. Robert mundell is the father of the concept of optimum currency area mundell, 1961 and he has since then taught us a great deal more about it mundell, 1970, 1999, 2003. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. Martina furrutter 022012 in 1961 robert mundell published his famous article a theory of optimum currency areas1 presenting his idea of an optimal monetary area in which there should be perfect internal mobility of factors and external immobility of factors. An optimum currency area oca is a theoretical notion. This paper aims to provide a critical analysis of the evolution of the optimum currency area theory. Paper prepared for discussion at the american management association conference on future of the international monetary system. For a currency area to be optimal strictly speaking, it must nearly always be necessary for various regions of a single state to join with different monetary areas, each having its own currency. First, is a country, say x, an optimum currency area.
After a rise in research activity during the 1960s, the paradigm fell from favor in the 1970s and 1980s, before it re. The case for separate currency areas clearly holds good only if the impact of a shock varies between areas. But in comparison with usa or canada, the eu has less premises to effectively become such an area. From his theory of optimum currency areas published in 1961, mundell seemed to be arguing in favor of making.
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