Optimum currency area, Microeconomics

Optimum currency area:

An optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a new currency. An optimal currency area may often be larger than a country. For instance, part of the rationale behind the creation of the euro was that the individual countries of Europe did not each form an optimal currency area, but that Europe as a whole does form an optimal currency area.

The main characteristics of an optimum currency area are:
1) Labour should have free mobility across the region. This includes physical ability to travel (visas, worker's rights, etc.), lack of cultural barriers to free movement (such as different languages) and institutional arrangements (such as the ability to have pension transferred and to the new region).

2) Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of demand and supply automatically distribute money and goods to where they are needed. In practice this does not work perfectly as there is no true wage flexibility.

There should be an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics. This usually takes the form of taxation redistribution to less developed areas of a country/region. This policy, though theoretically accepted, is politically difficult to implement as the better-off regions rarely give up their revenue easily.
Additional criteria that have been suggested for a region to be called an OCA by some economists are: there should be (a) production diversification (b) homogeneous preferences and (c) commonality of objectives The classical case for optimum currency areas assumes not only a similarity among participating countries, but also a high level of economic integration among participating countries. This theory has been most frequently applied in recent years to the euro and the European Union. 

By the above criteria the European Union does not constitute an Optimal Currency Area and therefore the Euro should not be a successful union of currencies. Although the developing world's experience with monetary unions has been neither abundant nor successful, European monetary integration has led to some initiatives for forming monetary unions in the developing world. The initiative taken by the members of the Gulf Cooperation Council stands out in this regard.

Posted Date: 11/9/2012 7:01:02 AM | Location : United States







Related Discussions:- Optimum currency area, Assignment Help, Ask Question on Optimum currency area, Get Answer, Expert's Help, Optimum currency area Discussions

Write discussion on Optimum currency area
Your posts are moderated
Related Questions
Mathematical Presentation of Utility maximisation: Consumer's objective is to maximise her utility by solving UMP. To solve UMP, we set the Lagrange function of the correspond


Analyze the various ways in which property rights encourage economic development and make at least one recommendation for improving current laws. Explain your rationale.

Ask qIf the supply and demand curves for labor are represented by the following equations: Wd= -- (1/100)Ld + 30 Ws= (1/200)Ls Ws=Wd Ld=Ld a. Graph the results and show the equili

Should the manufacture, supply and use of tobacco be criminalised? Provide arguments for and/or against (relates to defining crime; concepts of deviance etc) Examine t

supply and demand

What is utility maximization according to consumer behavior? Consumer Behavior: Utility Maximization A foundational hypothesis onto individual behavior within modern econ

Taxes: Compulsory government levies collected to pay for public spending. There are numerous types of taxes (corporate, income, wealth, sales, environmentaland payroll taxes); each

Separate Administrative Set-up for Exports:   It may be worth examining the setting up of Foreign Trade Board, similar to what obtains in Japan (JETRO) and South Korea (KETRO)

why raise MC cost after minimum level ?