Mundell, Robert (1961) A theory of optimum currency areas. The eurozone is a geographic area that consists of the European Union (EU) countries that have fully incorporated the euro as their national currency. 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 this model, the primary concern is that asymmetric shocks may undermine the benefit of the OCA. In my booklet Mundell (1965), I analyzed a model of three currency areas--the dollar area, the sterling area, and a third bloc based on a European currency, what I called the Athaler@ area. European Economic and Monetary Union (EMU) Definition, Optimum Currency Area (OCA) Theory Definition. While traditionally each country has maintained its own separate, national currency, work by Robert Mundell in the 1960s theorized that this might not be the most efficient economic arrangement. The original OCA theory. 1961. In particular, countries that share strong economic ties may benefit from a common currency. Countries that are heavily specialized in certain goods that other countries do not produce will be vulnerable to asymmetric economic shocks in those industries, and might not be suitable for membership in the OCA. Note that this criteria can come into conflict with some of the above criteria, because the greater the degree of integration among countries' economies (mobility of goods, labor, and capital) the more they will tend to specialize in different industries. In Mundell’s paradigm, policymakers balance the saving in transactions costs from the creation of a single money against the consequences of diminished policy autonomy. Downloadable! by Mundell (1961), McKinnon (1963a), and Kenen (1969) employ this approach. The following points highlight the top five contributions of Robert A. Mundell to Economics. The euro raises issues addressed by a theory known as the optimum currency area (OCA) theory. However, in practice this was abandoned early on in the sovereign debt crisis. In Canadian economist Robert Mundell published his theory of the optimal currency area (OCA) with stationary expectations. ... did not constitute an optimum currency area, as it met the above-mentioned criteria only partially. 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: Under what circumstances is it advantageous for a number of regions to relinquish their monetary sovereignty in favor of a common currency? A national currency however, was considered an axiom. Consider a number of countries, and call them a region. Get smart with the Thesis WordPress Theme from DIYthemes. stable url American Economic Association A Theory of Optimum Currency Areas Author(s): Robert A. Mundell Source: The American Economic Review, Vol. 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. 51, No. A Conference on Optimum Currency Areas at Tel-Aviv University, 5th December 1997. Technically, the European Stability and Growth Pact included a “no-bailout” clause that specifically restricted fiscal transfers. Macroeconomic stability is enhanced if the currency area has a high degree of internal factor mobility relative to the cross-border factor mobility. I thank Rich Lyons and Janet Yellen for comments. The "optimum" currency area is not the world. Optimum Currency Areas. 657-665 Overall, this episode implies that due to the asymmetry of the economic shock to Greece relative to other countries in the EMU and apparent shortfalls in the EMU’s qualification as an OCA under Mundell’s criteria, that Greece (and perhaps other countries) might not actually fall within the OCA for the euro. Easing labor mobility includes lowering administrative barriers such as visa-free travel, cultural barriers such as different languages, and institutional barriers such as restrictions on remittance of. Optimality is here defined in terms of the ability to stabilize national employment and price levels. 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