Interpreting the European monetary union with OCA criteria

Abstract

This aim of this study is to reinterpret optimum currency area (OCA) theory to assess the capacity of a monetary union to produce economic growth. Instead of utilizing OCA criteria to evaluate the costs and benefits of a monetary union, we use Kathleen R. McNamara’s framework to assemble them and analyze their interaction and effect on economic growth. First, we show that OCA theory is unable to address the question. Then, we develop a new framework and conclude that a monetary union brings structural deflation, economic divergence, and current account imbalances. Finally, we test these conclusions on the European monetary union. Post-Keynesian works are mobilized to show their concomitance with our framework in the second and third sections of this paper.