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Optimum currency areas

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Research into the optimal size for a geographic area to be covered by one common currency is generally dated to a 1961 paper by Robert Mundell, "A Theory of Optimum Currency Areas", published in the American Economic Review.

Mundell questioned the conventional wisdom that the ideal was to have one universal currency. He argued that areas that internally have high labor mobility and are exposed to the same sorts of macroeconomic shocks are suited to share a common currency. However, if there is low labor mobility (possible restrictions include language and cultural frictions) between this area and another area which is exposed to different shocks, different currencies may be preferred because the currency exchange market may, through adjustment, serve to prevent trade imbalances.

Currency area theories, in addition to labor mobility have also included general factor mobility. Resources are sometimes geographically fixed, large-scale capital investment has a great degree of fixedness in the short-run, etc.

ReferencesEdit

McKinnon, Ronald. "Mundell, the Euro, and Optimum Currency Areas." 2000.

Lecture by Tyler Cowen, fall 2005.

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