Date: 2008
Type: Working Paper
A Modern Reconsideration of the Theory of Optimal Currency Areas
Working Paper, EUI ECO, 2008/12
CORSETTI, Giancarlo, A Modern Reconsideration of the Theory of Optimal Currency Areas, EUI ECO, 2008/12 - https://hdl.handle.net/1814/8083
Retrieved from Cadmus, EUI Research Repository
What can be learnt from revisiting the Optimal Currency Areas (OCA) theory 50
years from its birth, in light of recent advances in open economy macro and monetary
theory? This paper presents a stylized micro-founded model of the costs of adopting a
common currency, relative to an ideal benchmark in which domestic monetary
authorities pursue country-specific efficient stabilization. Costs from (a) limiting
monetary autonomy and (b) giving up exchange rate flexibility are examined in turn.
These costs will generally be of the same magnitude as the costs of the business
cycle. However, to the extent that exchange rates do not perform the stabilizing role
envisioned by traditional OCA theory, a common monetary policy can be as efficient
as nationally differentiated policies, even when shocks are strongly asymmetric,
provided that the composition of aggregate spending tends to be symmetric at unionwide
level. Convergence in consumption (and spending) patterns thus emerges as a
possible novel attribute of countries participating in an efficient currency area.
Cadmus permanent link: https://hdl.handle.net/1814/8083
ISSN: 1725-6704
Series/Number: EUI ECO; 2008/12
Publisher: European University Institute