This paper surveys the optimum currency area (OCA) literature. It is organised into four phases: the "pioneering phase" which put forward the OCA theory and its properties, the "reconciliation phase" when its diverse facets were combined, the "reassessment phase" that led to the "new OCA theory", and the "empirical phase" during which the theory was subject to due empirical scrutiny. We make systematic reference to the European economic and monetary union (EMU) to which the OCA theory has been most frequently applied. All pioneering contributions are still relevant. Several early weaknesses have now been amended. Meanwhile, the balance of judgements has shifted in favour of currency unions. They are now deemed to generate fewer costs in terms of the loss of autonomy of domestic macroeconomic policies, and there is greater emphasis on the benefits. Looking ahead we are confronted with two distinct paradigms - specialisation versus "endogeneity of OCA".

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'New' Views on the Optimum Currency Area Theory: What is EMU Telling Us?

We review the literature on business cycle correlation between the euro area and the Central and Eastern European countries (CEECs), a topic that has gained attention as the newest EU members approach monetary union. Our meta-analysis of 35 identified publications suggests some CEECs already have comparably high correlation with the euro area business cycle. We find that estimation methodologies can have a significant effect on correlation coefficients. While CEEC central bankers tend to be more conservative in their estimates than academics or eurosystem researchers, we find no evidence of a geographical bias in the studies.

Meta-Analysis of the Business Cycle Correlation Between the Euro Area and the CEECs

Since the introduction of the euro in January 1999, exchange rate stability at the periphery of the euro area is growing. The paper investigates the impact of exchange rate stability on growth for a sample of 41 mostly small open economies at the EMU periphery. It identifies international trade, international capital flows and macroeconomic stability as important transmission channels from exchange rate stability to more growth. It is argued that fixed exchange rates provide a more stable framework for the adjustment of asset and labour markets of countries in the economic catch-up process thereby accelerating growth. Panel estimations reveal a robust negative relationship between exchange rate volatility and growth for countries in the economic catch-up process with open capital accounts.

/pdf/exchange-rate-volatility-and-growth-in-small-open-economies-3n40a36txz.pdf

Exchange Rate Volatility and Growth in Small Open Economies at the EMU Periphery

For more than a decade before the great crisis of 1997-98, East Asian countries pegged softly to the U.S. dollar. In the period of currency chaos from mid 1997 through 1998 with exchange depreciations in eight East Asian countries, massive deflationary pressure in dollar terms which was unleashed in the whole East Asian region. Surprisingly, however, the post-crisis exchange rate regime in 1999 into 2000 again exhibits high frequency pegging to the dollar much like the pre-crisis regime. In 1999-2000, there was (is) a honeymoon effect where short-term rates of interest in the crisis economies remained unusually low so that hot money flows were temporarily muted. But this honeymoon will end as the crisis recedes in time. Finally, I explore how the informal rules of the game under which the East Asian dollar standard operates might be improved to (1) lengthen the term structure of finance-including exchange rate obligations-to make the system more resilient, and (2) tighten bank regulation so as to reduce moral hazard in international capital flows.

After the Crisis, the East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging

This essay follows the synergies and complementarities between European Economic and Monetary Union (EMU) and the optimum currency area (OCA) theory.Â Various advancements in economic theory and econometrics have made it possible to progress from the âearly OCA theoryâ to a ânew OCA theoryâ.Â The balance of judgements has shifted in favour of monetary union: it is deemed to generate fewer costs and there is more emphasis on benefits. The âendogeneity of OCAâ has further strengthened this consideration. Yet there is still no simple OCA test. When EMU made the leap to the Maastricht Treaty, the OCA theory could not deliver clear policy guidance.Â Plans for EMU went ahead as a follow-up of the Single Market Programme (SMP) with only limited direct input from the OCA theory.

/pdf/european-economic-and-monetary-integration-and-the-optimum-lqtzkif9hi.pdf

European economic and monetary integration and the optimum currency area theory

Foreword Robert A Mundell Participants Introduction Harry G Johnson and Alexander K Swoboda Part 1: The Economics of Fixed Exchange Rates 1. Two Arguments for Fixed Rates Arthur B Laffer Comments Gottfried Haberler, Bela Balassa 2. The Flexibility of the Gold-Exchange Standard and Its Limits Jurg Niehans 3. The Price-Specie-Flow Mechanism and the Gold Exchange Standard: Some Exploratory Empiricism Relating to the Endogeneity of Country Money Balances Thomas J Courchene 4. The Dual Currency System Revisited Ronald I McKinnon Part 2: The Economics of Common Currency Areas 5. Some Early Views on Monetary Integration Thomas Guggenheim 6. The Theory of Optimum Regional Associations Herbert G Grubel 7. Uncommon Arguments for Common Currencies Robert A Mundell 8. Policy Conflict, Inconsistent Goals and the Co-ordination of Economic Policies Alexander K Swoboda 9. A Plan for a European Currency Robert A Mundell Comment Bela Balassa 10. The Impact of External Markets for National Currencies on Central Bank Reserves Robert Z Aliber 11. Joint Balance: Capital Mobility and the Monetary system of a Currency Area Sven W Arndt 12. Optimum Currency Areas and Latin America Alexandre Kafka Part 3: The Economics of Flexible Exchange Rates 13. The US Balance of Payments: Freedom or Controls Gottfried Haberler 14. Flexing the International Monetary System: The Case for Gliding Parities Richard N Cooper 15. Specific Proposal for Limited Exchange Rate Flexibility William Fellner 16. Flexible Exchange Rates and Traded Goods Prices: The Role of Oligopoly Pricing in the Canadian Experience Robert M Dunn, Jr. 17. The Optimal Rate of Devaluation Ruben Almonacid Manuel Guitian. Index

Miltiades Chacholiades

Papers

The economics of common currencies