A Modern Exchange Rate Theory Perspective

Abstract

The economic literature conventionally investigates regional monetary integration based on the optimum currency area (OCA) theory established by Mundell (1961). Numerous contributions have been made to OCA theory. These studies largely concentrate on empirically exploring how appropriate various regions in the world are in their ability to fit the conditions for successful regional monetary integration that have been set up by the first generation of OCA literature (see Mundell, 1961; Kenen, 1969; McKinnon, 1973; see also Corden, 1972). By and large, OCA theory focuses on examining the economic costs associated with giving up monetary sovereignty by giving up exchange rate policy as an autonomous monetary policy tool. A central conclusion of OCA theory is that integrating countries need to show symmetric reactions to external shocks and a high level of economic convergence in order to benefit from creating a common currency area. In line with this argument, first-generation authors identified three main optimality conditions for regional monetary integration.1 KeywordsExchange RateMonetary PolicyPhillips CurveCommon CurrencyCurrency UnionThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.