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. Optimum currency areas the works of robert mundell. The start of the oca theory are the seminal contributions by mundell 1961. American economic association a theory of optimum currency areas authors. Published by mundell in 1961, this is the most cited by economists. Robert alexander mundell, american economic association. The theory of optimal currency areas, developed by mundell 1961, mckinnon 1963.
The theory of optimum currency areas pioneered by mundell was further complemented by mckinnon and again by kenen. A plan for a european currency in a plan for a european currency, a 1969 unpublished paper recently rediscovered, robert mundell outlines his vision for a european currency. Robert mundell how important will the euro be in the framework of world interna. The optimum currency area approach to european monetary. As another nobelist, paul krugman, notes, the creation of the eurozone violated the basic economic rule. Forty years after robert mundell put forth his celebrated theory of optimum currency areas, the analytical consensus based on his. A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its. An optimum currency area oca is a theoretical notion.
Mundell, in full robert alexander mundell, born oct. Taking the seminal papers of robert mundell as the starting point, this article first analyses traditional theorizing on the pros and cons of. The uk is too small and too open to be an optimal currency area. This pdf is a selection from a published volume from the. A theory of optimum currency areas1 san francisco state.
Certain parts of the world are undergoing processes of economic. Mundell warned the reader not to regard the exercise as purely academic. Currency areas, exchange rate systems and international. View enhanced pdf access article on wiley online library html view download pdf for offline viewing. Anderton, robert, and frauke skudelny 2001, the impact of extra and. Download pdf a model of an optimum currency area free. While traditionally each country has maintained its own separate, national. The first economic criterion was proposed by robert mundell at the time he formulated the concept of optimum currency area. European monetary integration led to a renaissance of the theory of optimum currency areas oca culminating in the 1999 award of the nobel prize to robert mundell. Second is the subordinate debate on whether one needs full monetary union as in continental europe to secure an optimum currency areas internal domain. In the first part of the paper i will address the foundation of this theory through the contributions of mundell 1961. The results of multiple researches on optimum currency area theory took the shape of three classic economic criteria and three additional ones of a political nature. The optimum currency area theory and the emu intereconomics. Three of mundells achievements are particularly worthy of note.
In contrast to robert mundells optimum currency area theory and his recommendation of forming a monetary union, the economic fundamentals of euro area member countries have not harmonized. The theory of optimum currency areas, initiated by robert mundell 1961, is the organizing framework for the analysis. He singlehandedly invented the concept of an optimum currency area, perhaps 1 this paper is a revision of an earlier paper which evaluated the economic contr ibutions of robert mundell. Macdonald lecture in business and public policy at carleton university in ottawa.
Robert mundell s pioneering theory of optimum currency areas is revisited, with experts from the imf, the bis, the european investment bank, academia, european think tanks, and the bank of israel looking at its current practical applications, especially in the context of the forthcoming european economic and monetary union emu. According to the oca theory, a country that considers membership in a currency union has to balance the. The comment was on a paper written by robert solow. Carleton university, ottawa, canada, 2002 on april 4, 2002, nobel laureate in economics robert mundell, currently university professor emeritus at columbia university, delivered the sir john a. In much of the work on macroeconomics before mundells work of the early 1960s, economists assumedimplicitly or explicitlya closed economy, that is, an economy with.
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 contributes to the international leadership of the usa. Mundells classic formulation of an optimal currency area was aimed, in part, at refuting. Mundells 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. Robert mundell was awarded the 1999 nobel prize in economics for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas. This paper aims to provide a critical analysis of the evolution of the optimum currency area theory. Robert mundell, evil genius of the euro greg palast. There should not be a currency division along to geographic and national borders. Paper prepared for discussion at the american management association conference on future of the international monetary system. Mundell, robert 1961 a theory of optimum currency areas. This paper surveys the literature on the optimum currency area oca theory. Kenen peter b the theory of optimum currency areas an eclectic view in mundell from economics 3101, 3202 at university of minnesota. In mundells paradigm, policymakers balance the saving in transactions costs from the creation of a single money against the consequences of diminished policy autonomy. 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.
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. Currency areas, exchange rate systems and international monetary reform robert mundell c. Lowell harriss professor of economics columbia university 1. The optimum currency area theory and the euro robert a. Optimum currency areas and the european experience citeseerx.
Models optimum currency area with stationary expectations. A theory of optimum currency areas robert alexander. Download pdf optimum currency areas free online new. Mundells 1961 seminal paper a theory of optimum currency areas. Robert mundells pioneering theory of optimum currency areas is revisited, with experts from the imf, the bis, the european investment bank, academia, european think tanks, and the bank of israel looking at its current practical applications, especially in the context of the forthcoming european economic and monetary union emu. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. Optimum currency area an epistemological view full paper. Optimum currency areas and the european experience.
Pdf the theory of optimum currency areas researchgate. In the first part of the paper i will address the foundation of this theory through the contributions of mundell 1961, mckinnon 1963. 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. In economics, an optimum currency area oca, also known as an optimal currency region. But this paradox can be resolved by noting that there are two mundell modelsearlier and later.
A national currency however, was considered an axiom. Robert mundell 1961 popularised topic of optimum currency area to apply to the a geographic region that potentially could benefit from one monetary policy in a common currency or pegged. Kenen peter b the theory of optimum currency areas an. There has been a flood of research on the asymmetry of shocks in europe. It is a great satisfaction to be the recipient of so much kindness occasioned by my 1961 article on optimum currency areas. Currency areas, policy domains, and the institutionalization of fixed. I n a pioneering article published in 1961, professor mundell endeavoured to lay the foundations of a theory of optimum currency areas. Robert mundell himself offers an update to help in assessing the. 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. 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. The theory of optimal currency area was introduced by robert mundell in 1961. The optimum currency area approach to european monetary integration. 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. 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.
A model of an optimum currency area download a model of an optimum currency area ebook pdf or read online books in pdf, epub, and mobi format. The endogenity of the optimum currency area criteria pdf. Here asymmetric shocks are considered to undermine the real economy, so if they are too important and cannot be controlled, a regime with floating exchange rates is considered better, because the global monetary policy interest rates will not be fine tuned for the. In summary, optimum currency area theory suggested two big things to look atlabor mobility. The geographic area in which a single currency would create the greatest economic benefit. The case for separate currency areas clearly holds good only if the impact of a shock varies between areas. Monetary dynamics money illusion multiregional countries national currencies national money supplies number of currencies optimum currency area ployment pressure in region real income regional currency areas rency area separate currency single currency area stabilization. The theory of optimumcurrencyareas was conceived and developed in three highly influential papers. From his theory of optimum currency areas published in 1961, mundell seemed to be arguing in favor of making. First of all, let me say robert mundell and milton friedman debate the virtuesor notof fixed exchange rates, gold, and a world currency. In what follows, a precise account of the various contributions towards the theory is presented. A theory of optimum currency areas 177 currency areas and common currencies 178 national currencies and flexible exchange rates 179 regional currency areas and flexible exchange rates 180 a practical application 181 upper limits on the number of currencies and currency areas 182 concluding argument 184 chapter.